IDEAS home Printed from https://ideas.repec.org/a/eee/indorg/v31y2013i3p238-247.html
   My bibliography  Save this article

Incentives and compensation schemes: An experimental study

Author

Listed:
  • Agranov, Marina
  • Tergiman, Chloe

Abstract

When the performances of agents are correlated (because of a common random component), contracts that use information on both the relative and absolute performances of agents theoretically outperform rank-order tournaments and piece-rate schemes. Although the theoretical advantage of such contracts has long been noticed in the literature, the empirical papers that study this question have produced mixed results. Using a controlled laboratory experiment, we shed light on the performance of these contracts. We focus on the simplest version of such a contract: the relative piece-rate (RPR) and compare its performance with that of the tournament and piece-rate schemes. We find that when the RPRs are imposed on the agents, they exert higher effort levels and give the principal (weakly) higher profits than the tournament and piece-rate contracts. Second, we find that agents have little aversion to self-select into the RPR scheme when other alternatives are available. In our paper we fix the environment agents face and vary only their wage scheme. Our results support the theoretical predictions and suggest that principals can benefit from using RPR schemes in places where the piece-rate and tournament contracts would otherwise be used.

Suggested Citation

  • Agranov, Marina & Tergiman, Chloe, 2013. "Incentives and compensation schemes: An experimental study," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 238-247.
  • Handle: RePEc:eee:indorg:v:31:y:2013:i:3:p:238-247
    DOI: 10.1016/j.ijindorg.2012.06.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167718712000665
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.ijindorg.2012.06.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Atanu Saha & C. Richard Shumway & Hovav Talpaz, 1994. "Joint Estimation of Risk Preference Structure and Technology Using Expo-Power Utility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 173-184.
    2. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    3. Barro, Jason R & Barro, Robert J, 1990. "Pay, Performance, and Turnover of Bank CEOs," Journal of Labor Economics, University of Chicago Press, vol. 8(4), pages 448-481, October.
    4. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 817-869.
    5. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
    6. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics," Introductory Chapters, in: Robert Gibbons & John Roberts (ed.),The Handbook of Organizational Economics, Princeton University Press.
    7. Thomas Lemieux & W. Bentley MacLeod & Daniel Parent, 2009. "Performance Pay and Wage Inequality," The Quarterly Journal of Economics, Oxford University Press, vol. 124(1), pages 1-49.
    8. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 917-962.
    9. Reinhard Selten & Abdolkarim Sadrieh & Klaus Abbink, 1999. "Money Does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse," Theory and Decision, Springer, vol. 46(3), pages 213-252, June.
    10. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "The Other Side of the Trade-off: The Impact of Risk on Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 65-105, February.
    11. Uri Gneezy & Kenneth L. Leonard & John A. List, 2009. "Gender Differences in Competition: Evidence From a Matrilineal and a Patriarchal Society," Econometrica, Econometric Society, vol. 77(5), pages 1637-1664, September.
    12. Andrew Schotter & Keith Weigelt, 1992. "Asymmetric Tournaments, Equal Opportunity Laws, and Affirmative Action: Some Experimental Results," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 511-539.
    13. Booth, Alison & Nolen, Patrick, 2012. "Choosing to compete: How different are girls and boys?," Journal of Economic Behavior & Organization, Elsevier, vol. 81(2), pages 542-555.
    14. Sung Wook Joh, 1999. "Strategic Managerial Incentive Compensation In Japan: Relative Performance Evaluation And Product Market Collusion," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 303-313, May.
    15. Cason, Timothy N. & Masters, William A. & Sheremeta, Roman M., 2010. "Entry into winner-take-all and proportional-prize contests: An experimental study," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 604-611, October.
    16. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-581, June.
    17. Jed DeVaro, 2006. "Internal promotion competitions in firms," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 521-542, September.
    18. Dirk Jenter & Fadi Kanaan, 2015. "CEO Turnover and Relative Performance Evaluation," Journal of Finance, American Finance Association, vol. 70(5), pages 2155-2184, October.
    19. van Dijk, Frans & Sonnemans, Joep & van Winden, Frans, 2001. "Incentive systems in a real effort experiment," European Economic Review, Elsevier, vol. 45(2), pages 187-214, February.
    20. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, December.
    21. Cox, James C & Oaxaca, Ronald L, 1995. "Inducing Risk-Neutral Preferences: Further Analysis of the Data," Journal of Risk and Uncertainty, Springer, vol. 11(1), pages 65-79, July.
    22. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1989. "Alternative Mechanisms for Corporate Control," American Economic Review, American Economic Association, vol. 79(4), pages 842-852, September.
    23. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    24. Alison L. Booth & Patrick Nolen, 2012. "Gender differences in risk behaviour: does nurture matter?," Economic Journal, Royal Economic Society, vol. 122(558), pages 56-78, February.
    25. Rietz, Thomas A, 1993. "Implementing and Testing Risk-Preference-Induction Mechanisms in Experimental Sealed-Bid Auctions," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 199-213, October.
    26. repec:rje:randje:v:37:y:2006:3:p:521-542 is not listed on IDEAS
    27. Muriel Niederle & Lise Vesterlund, 2007. "Do Women Shy Away From Competition? Do Men Compete Too Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 1067-1101.
    28. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-364, June.
    29. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    30. Dilip Mookherjee, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 433-446.
    31. Axel Ockenfels & Gary E. Bolton, 2000. "ERC: A Theory of Equity, Reciprocity, and Competition," American Economic Review, American Economic Association, vol. 90(1), pages 166-193, March.
    32. Vesna Prasnikar, 1993. "Binary Lottery Payoffs: Do They Control Risk Aversion?," Discussion Papers 1059, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    33. Walker, James M & Smith, Vernon L & Cox, James C, 1990. "Inducing Risk-Neutral Preferences: An Examination in a Controlled Market Environment," Journal of Risk and Uncertainty, Springer, vol. 3(1), pages 5-24, March.
    34. Knoeber, Charles R & Thurman, Walter N, 1994. "Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production," Journal of Labor Economics, University of Chicago Press, vol. 12(2), pages 155-179, April.
    35. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    36. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    37. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    38. Theofanis Tsoulouhas, 2010. "Hybrid Cardinal Tournaments," Economics Bulletin, AccessEcon, vol. 30(3), pages 2279-2288.
    39. Wu, Steven & Roe, Brian & Sporleder, Thomas, 2006. "Mixed Tournaments, Common Shocks, and Disincentives: An Experimental Study," MPRA Paper 21, University Library of Munich, Germany.
    40. Harbring, Christine & Irlenbusch, Bernd, 2003. "An experimental study on tournament design," Labour Economics, Elsevier, vol. 10(4), pages 443-464, August.
    41. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February.
    42. Steven D. Levitt, 1995. "Optimal Incentive Schemes When Only the Agents' "Best" Output Matters to the Principal," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 744-760, Winter.
    43. Bohm, Peter & Linden, Johan & Sonnegard, Joakim, 1997. "Eliciting Reservation Prices: Becker-DeGroot-Marschak Mechanisms vs. Markets," Economic Journal, Royal Economic Society, vol. 107(443), pages 1079-1089, July.
    44. Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring.
    45. Steven Wu & Brian Roe, 2005. "Behavioral and Welfare Effects of Tournaments and Fixed Performance Contracts: Some Experimental Evidence," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(1), pages 130-146.
    46. Knoeber, Charles R, 1989. "A Real Game of Chicken: Contracts, Tournaments, and the Production of Broilers," Journal of Law, Economics, and Organization, Oxford University Press, vol. 5(2), pages 271-292, Fall.
    47. Joyce E. Berg & Lane A. Daley & John W. Dickhaut & John R. O'Brien, 1986. "Controlling Preferences for Lotteries on Units of Experimental Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 281-306.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Emmanuel Dechenaux & Dan Kovenock & Roman Sheremeta, 2015. "A survey of experimental research on contests, all-pay auctions and tournaments," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 609-669, December.
    2. Zhen Wang & Tomislav Vukina, 2017. "Welfare effects of payment truncation in piece rate tournaments," Journal of Economics, Springer, vol. 120(3), pages 219-249, April.
    3. Roman M. Sheremeta, 2016. "The pros and cons of workplace tournaments," IZA World of Labor, Institute of Labor Economics (IZA), pages 302-302, October.
    4. Roman M. Sheremeta, 2013. "Overbidding And Heterogeneous Behavior In Contest Experiments," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 491-514, July.
    5. Cason, Timothy N. & Masters, William A. & Sheremeta, Roman M., 2020. "Winner-take-all and proportional-prize contests: Theory and experimental results," Journal of Economic Behavior & Organization, Elsevier, vol. 175(C), pages 314-327.
    6. Majerczyk, Michael & Sheremeta, Roman & Tian, Yu, 2019. "Adding tournament to tournament: Combining between-team and within-team incentives," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 1-11.
    7. Dodonova, Anna & Khoroshilov, Yuri, 2014. "Compensation and performance: An experimental study," Economics Letters, Elsevier, vol. 124(2), pages 304-307.
    8. Werner Güth & René Levínský & Kerstin Pull & Ori Weisel, 2016. "Tournaments and piece rates revisited: a theoretical and experimental study of output-dependent prize tournaments," Review of Economic Design, Springer;Society for Economic Design, vol. 20(1), pages 69-88, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    2. Roman M. Sheremeta, 2016. "The pros and cons of workplace tournaments," IZA World of Labor, Institute of Labor Economics (IZA), pages 302-302, October.
    3. Emmanuel Dechenaux & Dan Kovenock & Roman Sheremeta, 2015. "A survey of experimental research on contests, all-pay auctions and tournaments," Experimental Economics, Springer;Economic Science Association, vol. 18(4), pages 609-669, December.
    4. Josse Delfgaauw & Robert Dur & Arjan Non & Willem Verbeke, 2015. "The Effects of Prize Spread and Noise in Elimination Tournaments: A Natural Field Experiment," Journal of Labor Economics, University of Chicago Press, vol. 33(3), pages 521-569.
    5. Sun, Sophia Li & Habib, Ahsan, 2020. "Determinants and consequences of tournament incentives: A survey of the literature in accounting and finance," Research in International Business and Finance, Elsevier, vol. 54(C).
    6. Gill, David & Stone, Rebecca, 2010. "Fairness and desert in tournaments," Games and Economic Behavior, Elsevier, vol. 69(2), pages 346-364, July.
    7. Tor Eriksson & Sabrina Teyssier & Marie‐Claire Villeval, 2009. "Self‐Selection And The Efficiency Of Tournaments," Economic Inquiry, Western Economic Association International, vol. 47(3), pages 530-548, July.
    8. Dutcher, E. Glenn & Balafoutas, Loukas & Lindner, Florian & Ryvkin, Dmitry & Sutter, Matthias, 2015. "Strive to be first or avoid being last: An experiment on relative performance incentives," Games and Economic Behavior, Elsevier, vol. 94(C), pages 39-56.
    9. De Paola, Maria & Gioia, Francesca & Scoppa, Vincenzo, 2018. "The adverse consequences of tournaments: Evidence from a field experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 151(C), pages 1-18.
    10. Czibor, Eszter & Onderstal, Sander & Sloof, Randolph & van Praag, C. Mirjam, 2020. "Does relative grading help male students? Evidence from a field experiment in the classroom," Economics of Education Review, Elsevier, vol. 75(C).
    11. Gill, David & Stone, Rebecca, 2009. "Fairness and desert in tournaments," Discussion Paper Series In Economics And Econometrics 903, Economics Division, School of Social Sciences, University of Southampton.
    12. Vandegrift, Donald & Yavas, Abdullah, 2009. "Men, women, and competition: An experimental test of behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 554-570, October.
    13. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, December.
    14. Loukas Balafoutas & E. Glenn Dutcher & Florian Lindner & Dmitry Ryvkin, 2017. "The Optimal Allocation Of Prizes In Tournaments Of Heterogeneous Agents," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 461-478, January.
    15. Marinakis, Kosmas & Tsoulouhas, Theofanis, 2013. "Are tournaments optimal over piece rates under limited liability for the principal?," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 223-237.
    16. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    17. Curtis R. Price & Roman M. Sheremeta, 2015. "Endowment Origin, Demographic Effects, and Individual Preferences in Contests," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(3), pages 597-619, September.
    18. Gill, David & Stone, Rebecca, 2009. "Fairness and desert in tournaments," Discussion Paper Series In Economics And Econometrics 0903, Economics Division, School of Social Sciences, University of Southampton.
    19. Tor Eriksson & Sabrina Teyssier & Marie Claire Villeval, 2006. "Effort Self-Selection and the Efficiency of Tournaments," Post-Print halshs-00142876, HAL.
    20. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics," Introductory Chapters, in: Robert Gibbons & John Roberts (ed.),The Handbook of Organizational Economics, Princeton University Press.
    21. Yang, Fanzheng, 2013. "Using laboratory experiments to study otherwise unobservable labor market interactions," ISU General Staff Papers 201301010800004100, Iowa State University, Department of Economics.

    More about this item

    Keywords

    Incentives; Compensation schemes; Laboratory experiments; Moral-hazard;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:31:y:2013:i:3:p:238-247. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.