IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_432.html

Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments

Author

Listed:
  • Volker Meier

Abstract

Two alternative relative compensation schemes are compared with respect to total output that can be generated at a given sum of salaries. While the promotion regime guarantees that any salary increase is permanent, the premium system allows a reduction in the income of an agent to the base salary after one period. It is shown that the optimum promotion tournament system induces a higher total output than the optimum premium system. This result occurs because a promotion regime allows distortion in a contest in favor of winners of previous contests.

Suggested Citation

  • Volker Meier, 2001. "Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments," CESifo Working Paper Series 432, CESifo.
    • Handle: RePEc:ces:ceswps:_432
    as

    Download full text from publisher

    File URL: https://www.ifo.de/DocDL/cesifo_wp432.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Margaret A. Meyer, 1991. "Learning from Coarse Information: Biased Contests and Career Profiles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 15-41.
    3. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    4. Brendan O'Flaherty & Aloysius Siow, 1992. "On the Job Screening, up or out Rules, and Firm Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 25(2), pages 346-368, May.
    5. Margaret A. Meyer, 1992. "Biased Contests and Moral Hazard: Implications for Career Profiles," Annals of Economics and Statistics, GENES, issue 25-26, pages 165-187.
    6. Gibbons, Robert & Waldman, Michael, 1999. "Careers in organizations: Theory and evidence," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 36, pages 2373-2437, Elsevier.
    7. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-715, September.
    8. repec:adr:anecst:y:1992:i:25-26:p:08 is not listed on IDEAS
    9. 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.
    10. James A. Fairburn & James M. Malcomson, 2001. "Performance, Promotion, and the Peter Principle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 45-66.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    2. DeVaro, Jed, 2011. "Using "opposing responses" and relative performance to distinguish empirically among alternative models of promotions," MPRA Paper 35175, University Library of Munich, Germany.
    3. Waldman, Michael, 2013. "Classic promotion tournaments versus market-based tournaments," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 198-210.
    4. Alexander K. Koch & Julia Nafziger, 2012. "Job Assignments under Moral Hazard: The Peter Principle Revisited," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(4), pages 1029-1059, December.
    5. Michael Waldman, 2012. "Theory and Evidence in Internal LaborMarkets [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    6. Suman Ghosh & Michael Waldman, 2010. "Standard promotion practices versus up‐or‐out contracts," RAND Journal of Economics, RAND Corporation, vol. 41(2), pages 301-325, June.
    7. Lorens Imhof & Matthias Kräkel, 2016. "Ex post unbalanced tournaments," RAND Journal of Economics, RAND Corporation, vol. 47(1), pages 73-98, February.
    8. William Fuchs, 2007. "Contracting with Repeated Moral Hazard and Private Evaluations," American Economic Review, American Economic Association, vol. 97(4), pages 1432-1448, September.
    9. Jed DeVaro & Michael Waldman, 2012. "The Signaling Role of Promotions: Further Theory and Empirical Evidence," Journal of Labor Economics, University of Chicago Press, vol. 30(1), pages 91-147.
    10. Münster, Johannes, 2006. "Selection Tournaments, Sabotage, and Participation," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 118, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    11. Jason G. Cummins & Ingmar Nyman, 2013. "Yes Men in Tournaments," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(4), pages 621-659, December.
    12. Kong-Pin Chen, 2005. "External Recruitment as an Incentive Device," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 259-278, April.
    13. Kräkel, Matthias & Schöttner, Anja, 2012. "Internal labor markets and worker rents," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 491-509.
    14. Florian Ederer, 2010. "Feedback and Motivation in Dynamic Tournaments," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(3), pages 733-769, September.
    15. Junichiro Ishida, 2012. "Dynamically Sabotage-Proof Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 30(3), pages 627-655.
    16. Melero Martín, Eduardo, 2004. "Evidence on Training and Career Paths: Human Capital, Information and Incentives," IZA Discussion Papers 1377, IZA Network @ LISER.
    17. Alberto Bayo-Moriones & Pedro Ortín-à ngel, 2006. "Internal Promotion versus External Recruitment in Industrial Plants in Spain," ILR Review, Cornell University, ILR School, vol. 59(3), pages 451-470, April.
    18. Matthias Kräkel, 2014. "Sandbagging," Journal of Sports Economics, , vol. 15(3), pages 263-284, June.
    19. Edward P. Lazear, 2004. "The Peter Principle: A Theory of Decline," Journal of Political Economy, University of Chicago Press, vol. 112(S1), pages 141-163, February.
    20. Robert Ridlon & Jiwoong Shin, 2013. "Favoring the Winner or Loser in Repeated Contests," Marketing Science, INFORMS, vol. 32(5), pages 768-785, September.
    21. Jed DeVaro & Antti Kauhanen, 2016. "An “Opposing Responses” Test of Classic versus Market-Based Promotion Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 34(3), pages 747-779.

    More about this item

    Keywords

    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_432. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.