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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Markus Pasche).
If references are entirely missing, you can add them using this form.