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Welfare effects of payment truncation in piece rate tournaments

Author

Listed:
  • Zhen Wang

    (The Brattle Group)

  • Tomislav Vukina

    (North Carolina State University)

Abstract

This article analyzes the optimal response of a principal to the regulatory proposal which would truncate agents’ bonus payment in a piece rate tournament at zero. In a model with risk-neutral and heterogenous abilities agents, we analyze the principal’s problem of optimal choice of contract parameters under both regular and truncated tournament scenarios. The results show that the principal could significantly mitigate potential welfare losses due to tournament truncation by adjusting the payment scheme. The optimal adaptation to tournament truncation results in a situation where both higher and lower ability players would benefit from the policy while average ability players would lose.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:jeczfn:v:120:y:2017:i:3:d:10.1007_s00712-016-0516-2
    DOI: 10.1007/s00712-016-0516-2
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    References listed on IDEAS

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    More about this item

    Keywords

    Tournaments; Incentives; Production contracts; Regulation;
    All these keywords.

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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