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Performance Pay, Sorting and Employers Choice:

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  • Hoffmann, Timo

Abstract

In this paper I analyze the attractiveness of a rank-order tournament if both market sides, employers and workers, can choose between several payment systems. I consider the self-selection of workers into different payment schemes, their effort provisions and the payment system choices of managers in a real effort laboratory experiment. Depending on the stage of the experiment, workers are either randomly tied to a manager or are sorted into the available payment schemes (a fixed wage, a piece-rate or a rank-order tournament) according to their preferences. When managers decide over the payment systems a cheap (low prize) tournament yields larger profits for the managers than a piece-rate contract. This is not the case for high prize tournaments. Furthermore, with worker choices I find a clear self-selection pattern: More productive workers self-selected into the variable payment schemes (piece-rate and tournament) and most workers prefer the safer option piece-rate to the tournament. Especially the low prize tournament is not chosen by many productive workers. As a consequence, even the low prize tournament does not yield larger profits than the piece-rate contract to managers. These findings show that in conditions in which a piece-rate payment is possible, rank-order tournaments are not simultaneously attractive for workers and employers.

Suggested Citation

  • Hoffmann, Timo, 2015. "Performance Pay, Sorting and Employers Choice:," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112968, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc15:112968
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    References listed on IDEAS

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    1. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 108(2), pages 437-459.
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    4. Alexandros Karakostas & Axel Sonntag & Daniel John Zizzo, 2013. "Efficiency and Fairness in Revenue Sharing Contracts," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 13-03, School of Economics, University of East Anglia, Norwich, UK..
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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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