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

Werner Güth (gueth@coll.mpg.de), René Levínský (rene.levinsky@gmail.com), Kerstin Pull and Ori Weisel (oriw@tauex.tau.ac.il)

No 2010-039, Jena Economics Research Papers from Friedrich-Schiller-University Jena

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.

Keywords: Tournaments; Incentives; Economic experiments (search for similar items in EconPapers)
JEL-codes: C72 C91 J33 (search for similar items in EconPapers)
Date: 2010-06-23
New Economics Papers: this item is included in nep-exp and nep-lab
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Citations: View citations in EconPapers (1)

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