Relative Performance Pay in the Shadow of Crisis
AbstractWe analyze whether incentives from relative performance pay are reduced or enhanced if a department is possibly terminated due to a crisis. Our benchmark model shows that incentives decrease in a severe crisis, but are boosted given a minor crisis since efforts are strategic complements in the former case but strategic substitutes in the latter one. We tested our predictions in a laboratory experiment. The results confirm the effort ranking but show that in a severe crisis individuals deviate from equilibrium significantly stronger than in other situations. This behavior contradicts the benchmark model and leads to a five times higher survival probability of the department. We develop a new theoretical approach that may explain playersâ€™ behavior.
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Bibliographic InfoPaper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 425.
Date of creation: 2013
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crisis; incentives; strategic complements; strategic substitutes; tournament;
Find related papers by JEL classification:
- C9 - Mathematical and Quantitative Methods - - Design of Experiments
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
- J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
- M5 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-25 (All new papers)
- NEP-EXP-2013-10-25 (Experimental Economics)
- NEP-HRM-2013-10-25 (Human Capital & Human Resource Management)
- NEP-LAB-2013-10-25 (Labour Economics)
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