Tournaments and Piece Rates Revisited: A Theoretical and Experimental Study of Premium Incentives
AbstractTournaments represent an increasingly important component of organizational compensation systems. While prior research focused on fixed-prize tournaments, i.e., on tournaments where the prize or prize sum to be awarded is set in advance, we introduce a new type of tournament into the literature: premium incentives. While premium incentives, just like fixed-prize tournaments, are based on relative performance, the prize to be awarded is not set in advance but is a function of the firm's success: the prize is high if the firm is successful and low if it is not successful. Relying on a simple model of cost minimization, we are able to show that premium incentives outperform fixed-prize tournaments as well as piece rates. Our theoretical result is qualitatively confirmed by a controlled laboratory experiment and has important practical implications for the design of organizational incentive systems.
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Bibliographic InfoPaper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2010-039.
Date of creation: 23 Jun 2010
Date of revision:
Tournaments; Incentives; Economic experiments;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-03 (All new papers)
- NEP-EXP-2010-07-03 (Experimental Economics)
- NEP-LAB-2010-07-03 (Labour Economics)
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- Werner Güth & Kerstin Pull & Manfred Stadler, 2009.
"Intra-firm Conflicts and Interfirm Competition,"
Jena Economic Research Papers
2009-007, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
- Güth, Werner & Pull, Kerstin & Stadler, Manfred, 2011. "Intrafirm conflicts and interfirm competition," University of Tuebingen Working Papers in Economics and Finance 14, University of Tuebingen, Faculty of Economics and Social Sciences.
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