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Tournaments versus Piece Rates under Limited Liability

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  • Matthias Krakel

    (Department of Economics, University of Bonn, Germany)

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    Abstract

    We discuss two incentive schemes that are frequently used in practice¬°Xtournaments and piece rates. The existing literature on the comparison of these two incentive schemes has focused on the case of unlimited liability. However, real workers' wealth is typically restricted. Therefore, this paper compares both schemes under the assumption of limited liability. The results show that piece rates dominate tournaments if idiosyncratic risk is sufficiently high despite the partial insurance effect of tournament compensation.

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    Bibliographic Info

    Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

    Volume (Year): 5 (2006)
    Issue (Month): 3 (December)
    Pages: 185-199

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    Handle: RePEc:ijb:journl:v:5:y:2006:i:3:p:185-199

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    Related research

    Keywords: incentives; piece rates; rank-order tournaments;

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    References

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    1. Fama, Eugene F, 1991. "Time, Salary, and Incentive Payoffs in Labor Contracts," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 25-44, January.
    2. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    3. Schmitz, Patrick W., 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," CEPR Discussion Papers 5145, C.E.P.R. Discussion Papers.
    4. Knoeber, Charles R & Thurman, Walter N, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 155-79, April.
    5. Robert Gibbons, 1986. "Piece-Rate Incentive Schemes," Working papers 424, Massachusetts Institute of Technology (MIT), Department of Economics.
    6. Edward P. Lazear & Paul Oyer, 2007. "Personnel Economics," NBER Working Papers 13480, National Bureau of Economic Research, Inc.
    7. Ehrenberg, Ronald G & Bognanno, Michael L, 1990. "Do Tournaments Have Incentive Effects?," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1307-24, December.
    8. Kahn, Charles & Scheinkman, Jose, 1985. "Optimal employment contracts with bankruptcy constraints," Journal of Economic Theory, Elsevier, vol. 35(2), pages 343-365, August.
    9. Marinakis, Kosmas & Tsoulouhas, Theofanis, 2013. "Are tournaments optimal over piece rates under limited liability for the principal?," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 223-237.
    10. Patrick W. Schmitz, 2005. "Workplace surveillance, privacy protection, and efficiency wages," Bonn Econ Discussion Papers bgse25_2005, University of Bonn, Germany.
    11. Richard B. Freeman & Morris M. Kleiner, 1998. "The Last American Shoe Manufacturers: Changing the Method of Pay to Survive Foreign Competition," NBER Working Papers 6750, National Bureau of Economic Research, Inc.
    12. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
    13. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
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