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Emotions and Incentives

  • Kräkel, Matthias

    ()

    (University of Bonn)

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 analyzed 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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File URL: http://ftp.iza.org/dp1270.pdf
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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1270.

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Length: 59 pages
Date of creation: Aug 2004
Date of revision:
Publication status: published as 'Emotions in tournaments' in: Journal of Economic Behavior and Organization, 2008, 67 (1), 204 - 214
Handle: RePEc:iza:izadps:dp1270
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  1. Koch, Alexander K. & Peyrache, Eloic, 2005. "Tournaments, Individualized Contracts and Career Concerns," IZA Discussion Papers 1841, Institute for the Study of Labor (IZA).
  2. Elster, Jon, 1996. "Rationality and the Emotions," Economic Journal, Royal Economic Society, vol. 106(438), pages 1386-97, September.
  3. Kandel, E. & Lazear, E.P., 1990. "Peer Pressure and Partnerships," Papers 90-07, Rochester, Business - Managerial Economics Research Center.
  4. 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.
  5. Andrea Ichino & Armin Falk, 2003. "Clean evidence on peer pressure," Natural Field Experiments 00239, The Field Experiments Website.
  6. 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.
  7. 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.
  8. Grund, Christian & Sliwka, Dirk, 2002. "Envy and Compassion in Tournaments," IZA Discussion Papers 647, Institute for the Study of Labor (IZA).
  9. Schotter, Andrew & Weigelt, Keith, 1990. "Asymmetric Tournaments, Equal Opportunity Laws And Affirmative Action: Some Experimental Result," Working Papers 90-14, C.V. Starr Center for Applied Economics, New York University.
  10. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  11. Jerry R. Green & Nancy L. Stokey, 1982. "A Comparison of Tournaments and Contracts," NBER Working Papers 0840, National Bureau of Economic Research, Inc.
  12. 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 841-64, October.
  13. Groh, Christian & Moldovanu, Benny & Sela, Aner & Sunde, Uwe, 2003. "Optimal Seedings in Elimination Tournaments," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 140, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  14. 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.
  15. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory Of Fairness, Competition, And Cooperation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 817-868, August.
  16. Dominique Demougin & Claude Fluet, 2003. "Inequity Aversion in Tournament," CIRANO Working Papers 2003s-18, CIRANO.
  17. 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.
  18. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  19. Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
  20. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
  21. 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.
  22. 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.
  23. 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.
  24. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
  25. Rosen, Sherwin, 1986. "Prizes and Incentives in Elimination Tournaments," American Economic Review, American Economic Association, vol. 76(4), pages 701-15, September.
  26. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  27. 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.
  28. 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.
  29. Mui, V.L., 1992. "The Economics of Envy," Papers 9306, Southern California - Department of Economics.
  30. 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).
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