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Setting incentives: Temporary performance premiums versus promotion tournaments

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  • Meier, Volker

Abstract

Two alternative relative compensation schemes are compared with respect to the 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 is obtained because a promotion regime allows a distortion in a contest in favor of winners of previous contests.

Suggested Citation

  • Meier, Volker, 2004. "Setting incentives: Temporary performance premiums versus promotion tournaments," Munich Reprints in Economics 19185, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:19185
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    References listed on IDEAS

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    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.
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    9. repec:adr:anecst:y:1992:i:25-26:p:08 is not listed on IDEAS
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