Technology Choice and Incentives under Relative Performance Schemes
AbstractWe identify a new problem that may arise when heterogeneous workers are motivated by relative performance schemes: If workers’ abilities and the production technology are complements, the firm may prefer not to adopt a more advanced technology even though this technology would costlessly increase each worker’s productivity. Due to the complementarity between ability and technology, under technology adoption the productivity of a more able worker increases more strongly than the productivity of a less able colleague, thereby reducing the motivation of both workers to exert effort under a relative incentive scheme. We show that this adverse incentive effect is dominant and, consequently, keeps the firm from introducing a better production technology if talent uncertainty is sufficiently high and/or monitoring of workers is sufficiently precise.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse10_2010.
Date of creation: May 2010
Date of revision:
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complementarities; heterogeneous workers; production technology; tournament.;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-29 (All new papers)
- NEP-BEC-2010-05-29 (Business Economics)
- NEP-CTA-2010-05-29 (Contract Theory & Applications)
- NEP-EFF-2010-05-29 (Efficiency & Productivity)
- NEP-LAB-2010-05-29 (Labour Economics)
- NEP-MIC-2010-05-29 (Microeconomics)
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