The existing literature on the comparison of tournaments and piece rates as alternative incentive schemes has focused on the case of unlimited liability. However, in practice real workers' wealth is typically restricted. Therefore, this paper compares both schemes under the assumption of limited liability. The results show that if the cost function is suffciently convex, first-best effort will be more likely implemented under piece rates than under tournaments. Moreover, if first-best implementation is not achieved and workers earn positive rents, efforts and profits will be larger for piece rates than for tournaments given suffciently convex costs. While tournaments offer a partial insurance due to their fixed prizes, piece rates may not work any longer if potential losses become prohibitively high. Finally, if risk is suffciently high, piece rates will dominate tournaments despite the partial insurance effect of tournament compensation. Since effort costs and risk may depend on an individual worker's characteristics, on the characteristics of his job and on his hierarchical position, these findings have important implications for the choice of incentive schemes and the allocation of workers in firms
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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number
bgse8_2004.
Length: 53 Date of creation: Jun 2004 Date of revision: Handle: RePEc:bon:bonedp:bgse8_2004
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Matthias Kräkel, 2004.
"Tournaments versus Piece Rates under Limited Liability,"
Discussion Papers
15, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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Find related papers by JEL classification: J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods M5 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics
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Derek J. Clark & Kai A. Konrad, 2005.
"Contests with multi-tasking,"
Discussion Papers
125, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich, revised May 2006.
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