IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Relative Performance Pay in the Shadow of Crisis

  • Kräkel, Matthias
  • Nieken, Petra

We analyze whether incentives from relative performance pay are reduced or enhanced if a department is possibly terminated due to a crisis. Our benchmark model shows that incentives decrease in a severe crisis, but are boosted given a minor crisis since efforts are strategic complements in the former case but strategic substitutes in the latter one. We tested our predictions in a laboratory experiment. The results confirm the effort ranking but show that in a severe crisis individuals deviate from equilibrium significantly stronger than in other situations. This behavior contradicts the benchmark model and leads to a five times higher survival probability of the department. We develop a new theoretical approach that may explain players’ behavior.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 425.

in new window

Date of creation: 2013
Date of revision:
Handle: RePEc:trf:wpaper:425
Contact details of provider: Postal:
Geschwister-Scholl-Platz 1, D-80539 Munich, Germany

Phone: +49-(0)89-2180-3405
Fax: +49-(0)89-2180-3510
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Urs Fischbacher & Simon Gaechter & Ernst Fehr, . "Are People Conditionally Cooperative? Evidence from a Public Goods Experiment," IEW - Working Papers 016, Institute for Empirical Research in Economics - University of Zurich.
  2. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics.
  3. Jerry R. Green & Nancy L. Stokey, 1982. "A Comparison of Tournaments and Contracts," NBER Working Papers 0840, National Bureau of Economic Research, Inc.
  4. Curtis R. Price & Roman M. Sheremeta, 2009. "Endowment Effects in Contests," Working Papers 09-07, Chapman University, Economic Science Institute.
  5. Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
  6. David Schmidt & Robert Shupp & James M. Walker, 2005. "Resource Allocation Contests: Experimental Evidence," Caepr Working Papers 2006-004, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington, revised Aug 2006.
  7. Sanford J. Grossman & Oliver D. Hart, 1982. "Corporate Financial Structure and Managerial Incentives," NBER Chapters, in: The Economics of Information and Uncertainty, pages 107-140 National Bureau of Economic Research, Inc.
  8. Roman M. Sheremeta, 2009. "Contest Design: An Experimental Investigation," Working Papers 09-05, Chapman University, Economic Science Institute.
  9. Roman M. Sheremeta, 2014. "Behavioral Dimensions of Contests," Working Papers 14-14, Chapman University, Economic Science Institute.
  10. Tor Eriksson & Sabrina Teyssier & Marie-Claire Villeval, 2006. "Self-Selection and the Efficiency of Tournaments," Working Papers 0603, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  11. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817, December.
  12. Bornstein, Gary & Gneezy, Uri & Nagel, Rosmarie, 2002. "The effect of intergroup competition on group coordination: an experimental study," Games and Economic Behavior, Elsevier, vol. 41(1), pages 1-25, October.
  13. Garvey, Gerald T & Swan, Peter L, 1992. "Managerial Objectives, Capital Structure, and the Provision of Worker Incentives," Journal of Labor Economics, University of Chicago Press, vol. 10(4), pages 357-79, October.
  14. Roman M. Sheremeta & Jingjing Zhang, 2009. "Can Groups Solve the Problem of Over-Bidding in Contests," Working Papers 09-09, Chapman University, Economic Science Institute.
  15. Babcock, Philip & Bedard, Kelly & Charness, Gary & Hartman, John & Royer, Heather, 2012. "Letting Down the Team? Social Effects of Team Incentives," University of California at Santa Barbara, Economics Working Paper Series qt93n646db, Department of Economics, UC Santa Barbara.
  16. Mago, Shakun & Sheremeta, Roman & Yates, Andrew, 2012. "Best-of-Three Contest Experiments: Strategic versus Psychological Momentum," MPRA Paper 43031, University Library of Munich, Germany.
  17. Coats, Jennifer C. & Gronberg, Timothy J. & Grosskopf, Brit, 2009. "Simultaneous versus sequential public good provision and the role of refunds -- An experimental study," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 326-335, February.
  18. Sheremeta, Roman, 2013. "Overbidding and Heterogeneous Behavior in Contest Experiments," MPRA Paper 44124, University Library of Munich, Germany.
  19. Gächter, Simon & Johnson, Eric J. & Herrmann, Andreas, 2007. "Individual-Level Loss Aversion in Riskless and Risky Choices," IZA Discussion Papers 2961, Institute for the Study of Labor (IZA).
  20. Tan, Jonathan H.W. & Bolle, Friedel, 2007. "Team competition and the public goods game," Economics Letters, Elsevier, vol. 96(1), pages 133-139, July.
  21. David de Meza & David C. Webb, 2007. "Incentive Design under Loss Aversion," Journal of the European Economic Association, MIT Press, vol. 5(1), pages 66-92, 03.
  22. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  23. Donald Vandegrift & Abdullah Yavas & Paul Brown, 2007. "Incentive effects and overcrowding in tournaments: An experimental analysis," Experimental Economics, Springer, vol. 10(4), pages 345-368, December.
  24. 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.
  25. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, vol. 87(3), pages 314-41, June.
  26. Garvey, Gerald & Swan, Peter L., 1992. "Optimal capital structure for a hierarchical firm," Journal of Financial Intermediation, Elsevier, vol. 2(4), pages 376-400, December.
  27. Gill, David & Stone, Rebecca, 2010. "Fairness and desert in tournaments," Games and Economic Behavior, Elsevier, vol. 69(2), pages 346-364, July.
  28. Sheremeta, Roman, 2009. "Experimental Comparison of Multi-Stage and One-Stage Contests," MPRA Paper 49884, University Library of Munich, Germany.
  29. Cadsby, Charles Bram & Maynes, Elizabeth, 1999. "Voluntary provision of threshold public goods with continuous contributions: experimental evidence," Journal of Public Economics, Elsevier, vol. 71(1), pages 53-73, January.
  30. Anja Schöttner, 2008. "Fixed-prize tournaments versus first-price auctions in innovation contests," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(1), pages 57-71, April.
  31. Rapoport, Amnon & Suleiman, Ramzi, 1993. "Incremental Contribution in Step-Level Public Goods Games with Asymmetric Players," Organizational Behavior and Human Decision Processes, Elsevier, vol. 55(2), pages 171-194, July.
  32. Sherwin Rosen, 1985. "Prizes and Incentives in Elimination Tournaments," NBER Working Papers 1668, National Bureau of Economic Research, Inc.
  33. van Dijk, Frans & Sonnemans, Joep & van Winden, Frans, 2001. "Incentive systems in a real effort experiment," European Economic Review, Elsevier, vol. 45(2), pages 187-214, February.
  34. Dragon, Robert & Garvey, Gerald T. & Turnbull, Geoffrey K., 1996. "A collective tournament," Economics Letters, Elsevier, vol. 50(2), pages 223-227, February.
  35. Christine Harbring & Bernd Irlenbusch, 2011. "Sabotage in Tournaments: Evidence from a Laboratory Experiment," Management Science, INFORMS, vol. 57(4), pages 611-627, April.
  36. Benedikt Herrmann & Henrik Orzen, 2008. "The appearance of homo rivalis: Social preferences and the nature of rent seeking," Discussion Papers 2008-10, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  37. McAfee, R Preston & McMillan, John, 1991. "Optimal Contracts for Teams," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 561-77, August.
  38. 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.
  39. 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.
  40. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1039-1061.
  41. Gaston, Noel, 1997. "Efficiency wages, managerial discretion, and the fear of bankruptcy," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 41-59, May.
  42. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  43. Kong-Pin Chen, 2003. "Sabotage in Promotion Tournaments," Journal of Law, Economics and Organization, Oxford University Press, vol. 19(1), pages 119-140, April.
  44. Christine Harbring & Gabriele K. Lünser, 2008. "On the Competition of Asymmetric Agents," German Economic Review, Verein für Socialpolitik, vol. 9, pages 373-395, 08.
  45. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 1-53.
  46. Hans K. Hvide, 2000. "Tournament Rewards and Risk Taking," Econometric Society World Congress 2000 Contributed Papers 0163, Econometric Society.
  47. Ehrenberg, Ronald G & Bognanno, Michael L, 1990. "Do Tournaments Have Incentive Effects?," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1307-24, December.
  48. Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, vol. 97(4), pages 1047-1073, September.
  49. Gürtler, Oliver, 2011. "The first-order approach in rank-order tournaments," Economics Letters, Elsevier, vol. 111(3), pages 185-187, June.
  50. Irlenbusch, Bernd & Ruchala, Gabriele K., 2008. "Relative rewards within team-based compensation," Labour Economics, Elsevier, vol. 15(2), pages 141-167, April.
  51. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  52. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-98, December.
  53. Alannah Orrison & Andrew Schotter & Keith Weigelt, 2004. "Multiperson Tournaments: An Experimental Examination," Management Science, INFORMS, vol. 50(2), pages 268-279, February.
  54. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  55. Lynch, James G., 2005. "The effort effects of prizes in the second half of tournaments," Journal of Economic Behavior & Organization, Elsevier, vol. 57(1), pages 115-129, May.
  56. 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.
  57. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
  58. 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.
  59. R. Isaac & David Schmidtz & James Walker, 1989. "The assurance problem in a laboratory market," Public Choice, Springer, vol. 62(3), pages 217-236, September.
  60. Palfrey, Thomas R & Prisbrey, Jeffrey E, 1997. "Anomalous Behavior in Public Goods Experiments: How Much and Why?," American Economic Review, American Economic Association, vol. 87(5), pages 829-46, December.
  61. Donald Vandegrift & Abdullah Yavas, 2011. "An experimental test of behavior under team production," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 32(1), pages 35-51, January.
  62. Stefan T. Trautmann & Ferdinand M. Vieider & Peter P. Wakker, 2011. "Preference Reversals for Ambiguity Aversion," Management Science, INFORMS, vol. 57(7), pages 1320-1333, July.
  63. Guido Friebel & Alexander Matros, 2005. "A note on CEO compensation, elimination tournaments and bankruptcy risk," Economics of Governance, Springer, vol. 6(2), pages 105-111, 07.
  64. James M. Malcomson, 1986. "Rank-Order Contracts for a Principal with Many Agents," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 807-817.
  65. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:trf:wpaper:425. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tamilla Benkelberg)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.