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Emotions and Incentives

  • Matthias Kräkel

We introduce a concept of emotions that emerge when workers compare their own performance with a given standard or with the performances of co-workers. Assuming heterogeneity among the workers the interplay of emotions and incentives is analysed by focusing on three incentive schemes that are frequently used in practice: tournaments, bonuses and piece rates. We identify certain conditions under which emotions lead to additional incentives and under which the employer benefits from emotional workers. Furthermore, the concept of emotions is used to explain puzzling results from laboratory and field experiments. Finally, the results provide some insights on an employer's possible preferences in favor of heterogeneous instead of homogeneous work groups.

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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse14_2004.

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Length: 59
Date of creation: Aug 2004
Date of revision:
Handle: RePEc:bon:bonedp:bgse14_2004
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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  1. O'Keeffe, Mary & Viscusi, W Kip & Zeckhauser, Richard J, 1984. "Economic Contests: Comparative Reward Schemes," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 27-56, January.
  2. Jerry R. Green & Nancy L. Stokey, 1982. "A Comparison of Tournaments and Contracts," NBER Working Papers 0840, National Bureau of Economic Research, Inc.
  3. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  4. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  5. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  6. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
  7. Christian Grund & Dirk Sliwka, 2005. "Envy and Compassion in Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(1), pages 187-207, 03.
  8. Falk, Armin & Ichino, Andrea, 2003. "Clean Evidence on Peer Pressure," IZA Discussion Papers 732, Institute for the Study of Labor (IZA).
  9. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
  10. 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.
  11. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Asymmetric Tournaments, Equal Opportunity Laws and Affirmative Action: Some Experimental Results," Working Papers 87-33, C.V. Starr Center for Applied Economics, New York University.
  12. Engellandt, Axel & Riphahn, Regina T., 2004. "Incentive Effects of Bonus Payments: Evidence from an International Company," IZA Discussion Papers 1229, Institute for the Study of Labor (IZA).
  13. Christian Groh & Benny Moldovanu & Aner Sela & Uwe Sunde, 2012. "Optimal seedings in elimination tournaments," Economic Theory, Springer, vol. 49(1), pages 59-80, January.
  14. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  15. Ronald Bosman & Frans van Winden, 2002. "Emotional Hazard in a Power-to-take Experiment," Economic Journal, Royal Economic Society, vol. 112(476), pages 147-169, January.
  16. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
  17. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-81, June.
  18. Dominique Demougin & Claude Fluet, 2003. "Inequity Aversion in Tournaments," Cahiers de recherche 0322, CIRPEE.
  19. Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-80, April.
  20. Kandel, E. & Lazear, E.P., 1990. "Peer Pressure and Partnerships," Papers 90-07, Rochester, Business - Managerial Economics Research Center.
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  22. repec:tpr:qjecon:v:109:y:1994:i:4:p:921-55 is not listed on IDEAS
  23. Weigelt, Keith & Dukerich, Janet & Schotter, Andrew, 1989. "Reactions to discrimination in an incentive pay compensation scheme: A game-theoretic approach," Organizational Behavior and Human Decision Processes, Elsevier, vol. 44(1), pages 26-44, August.
  24. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
  25. Mui, Vai-Lam, 1995. "The economics of envy," Journal of Economic Behavior & Organization, Elsevier, vol. 26(3), pages 311-336, May.
  26. Elster, Jon, 1996. "Rationality and the Emotions," Economic Journal, Royal Economic Society, vol. 106(438), pages 1386-97, September.
  27. Koch, Alexander K. & Peyrache, Eloic, 2005. "Tournaments, Individualized Contracts and Career Concerns," IZA Discussion Papers 1841, Institute for the Study of Labor (IZA).
  28. Hoffler, Felix & Sliwka, Dirk, 2003. "Do new brooms sweep clean? When and why dismissing a manager increases the subordinates' performance," European Economic Review, Elsevier, vol. 47(5), pages 877-890, October.
  29. Zabojnik, Jan & Bernhardt, Dan, 2001. "Corporate Tournaments, Human Capital Acquisition, and the Firm Size-Wage Relation," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 693-716, July.
  30. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-15, September.
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