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Incentives and compensation schemes: An experimental study

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  • 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
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    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. repec:kap:jeczfn:v:120:y:2017:i:3:d:10.1007_s00712-016-0516-2 is not listed on IDEAS
    3. Roman M. Sheremeta, 2016. "The pros and cons of workplace tournaments," IZA World of Labor, Institute for the Study of Labor (IZA), pages 302-302, October.
    4. 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.
    5. Roman M. Sheremeta, 2013. "Overbidding And Heterogeneous Behavior In Contest Experiments," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 491-514, July.
    6. Roman M. Sheremeta & William A. Masters & Timothy N. Cason, 2012. "Winner-Take-All and Proportional-Prize Contests: Theory and Experimental Results," Working Papers 12-04, Chapman University, Economic Science Institute.
    7. Majerczyk, Michael & Sheremeta, Roman & Tian, Yu, 2018. "Adding Tournament to Tournament: Combining Between-Team and Within-Team Incentives," MPRA Paper 86280, University Library of Munich, Germany.
    8. Dodonova, Anna & Khoroshilov, Yuri, 2014. "Compensation and performance: An experimental study," Economics Letters, Elsevier, vol. 124(2), pages 304-307.

    More about this item

    Keywords

    Incentives; Compensation schemes; Laboratory experiments; Moral-hazard;

    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

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