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Tournaments versus Piece Rates under Limited Liability

  • Matthias Krakel

    (Department of Economics, University of Bonn, Germany)

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    We discuss two incentive schemes that are frequently used in practice¬°Xtournaments and piece rates. The existing literature on the comparison of these two incentive schemes has focused on the case of unlimited liability. However, real workers' wealth is typically restricted. Therefore, this paper compares both schemes under the assumption of limited liability. The results show that piece rates dominate tournaments if idiosyncratic risk is sufficiently high despite the partial insurance effect of tournament compensation.

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    Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

    Volume (Year): 5 (2006)
    Issue (Month): 3 (December)
    Pages: 185-199

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    Handle: RePEc:ijb:journl:v:5:y:2006:i:3:p:185-199
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    1. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
    2. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, June.
    3. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
    4. Patrick W. Schmitz, 2005. "Allocating Control in Agency Problems with Limited Liability and Sequential Hidden Actions," RAND Journal of Economics, The RAND Corporation, vol. 36(2), pages 318-336, Summer.
    5. Schmitz, Patrick W., 2005. "Workplace surveillance, privacy protection, and efficiency wages," Labour Economics, Elsevier, vol. 12(6), pages 727-738, December.
    6. Son Ku Kim, 1997. "Limited Liability and Bonus Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 899-913, December.
    7. Ehrenberg, Ronald G & Bognanno, Michael L, 1990. "Do Tournaments Have Incentive Effects?," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1307-24, December.
    8. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    9. Kosmas Marinakis & Theofanis Tsoulouhas, 2006. "Are Tournaments Optimal over Piece Rates under Limited Liability for the Principal?," Working Paper Series 009, North Carolina State University, Department of Economics, revised Sep 2006.
    10. Fama, Eugene F, 1991. "Time, Salary, and Incentive Payoffs in Labor Contracts," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 25-44, January.
    11. 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 155-79, April.
    12. Richard B. Freeman & Morris M. Kleiner, 1998. "The Last American Shoe Manufacturers: Changing the Method of Pay to Survive Foreign Competition," NBER Working Papers 6750, National Bureau of Economic Research, Inc.
    13. Gibbons, Robert, 1987. "Piece-Rate Incentive Schemes," Journal of Labor Economics, University of Chicago Press, vol. 5(4), pages 413-29, October.
    14. Kahn, Charles & Scheinkman, Jose, 1985. "Optimal employment contracts with bankruptcy constraints," Journal of Economic Theory, Elsevier, vol. 35(2), pages 343-365, August.
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