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Tournaments and Piece Rates Revisited: A Theoretical and Experimental Study of Premium Incentives

Author

Listed:
  • Werner Güth

    () (Max Planck Institute of Economics, Strategic Interaction Group)

  • Rene Levínský

    (Max Planck Institute of Economics, Strategic Interaction Group)

  • Kerstin Pull

    (Eberhard Karls Universität Tübingen, Faculty of Economics and Business Administration)

  • Ori Weisel

    (The Hebrew University, Center for the Study of Rationality)

Abstract

Tournaments represent an increasingly important component of organizational compensation systems. While prior research focused on fixed-prize tournaments, i.e., on tournaments where the prize or prize sum to be awarded is set in advance, we introduce a new type of tournament into the literature: premium incentives. While premium incentives, just like fixed-prize tournaments, are based on relative performance, the prize to be awarded is not set in advance but is a function of the firm's success: the prize is high if the firm is successful and low if it is not successful. Relying on a simple model of cost minimization, we are able to show that premium incentives outperform fixed-prize tournaments as well as piece rates. Our theoretical result is qualitatively confirmed by a controlled laboratory experiment and has important practical implications for the design of organizational incentive systems.

Suggested Citation

  • Werner Güth & Rene Levínský & Kerstin Pull & Ori Weisel, 2010. "Tournaments and Piece Rates Revisited: A Theoretical and Experimental Study of Premium Incentives," Jena Economic Research Papers 2010-039, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2010-039
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    References listed on IDEAS

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    Cited by:

    1. Werner Güth & Kerstin Pull & Manfred Stadler, 2009. "Intra-firm Conflicts and Interfirm Competition," Jena Economic Research Papers 2009-007, Friedrich-Schiller-University Jena.

    More about this item

    Keywords

    Tournaments; Incentives; Economic experiments;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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