Setting Incentives: Temporary Performance Premiums versus Promotion Tournaments
Two alternative relative compensation schemes are compared with respect to the output that can be generated at a given sum of salaries. While the promotion regime guarantees that any salary increase is permanent, the premium system allows a reduction in the income of an agent to the base salary after one period. It is shown that the optimum promotion tournament system induces a higher total output than the optimum premium system. This result is obtained because a promotion regime allows a distortion in a contest in favor of winners of previous contests. Copyright 2004 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd.
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Volume (Year): 18 (2004)
Issue (Month): 4 (December)
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