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Technology Choice and Incentives under Relative Performance Schemes

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  • Matthias Kräkel

    ()

  • Anja Schöttner

Abstract

We 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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File URL: http://www.wiwi.uni-bonn.de/bgsepapers/bonedp/bgse10_2010.pdf
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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse10_2010.

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Length: 25
Date of creation: May 2010
Date of revision:
Handle: RePEc:bon:bonedp:bgse10_2010

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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Keywords: complementarities; heterogeneous workers; production technology; tournament.;

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