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Technology choice, relative performance pay, and worker heterogeneity

  • Kräkel, Matthias
  • Schöttner, Anja

Abstract We identify a new problem that may arise when heterogeneous workers are motivated by relative performance pay: if workers' abilities and the production technology are complements, the firm may prefer not to adopt a more advanced technology even though this technology would costlessly increase each worker's productivity. Due to the complementarity between ability and technology, under technology adoption the productivity of a more able worker increases more strongly than the productivity of a less able colleague. As a consequence, both workers' motivation to exert effort is reduced. We show that this adverse incentive effect is dominant and, consequently, keeps the firm from introducing a better production technology if talent uncertainty is sufficiently high and/or monitoring of workers is sufficiently precise.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 76 (2010)
Issue (Month): 3 (December)
Pages: 748-758

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Handle: RePEc:eee:jeborg:v:76:y:2010:i:3:p:748-758
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