Tournaments versus Piece Rates under Limited Liability

Matthias Krakel
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Matthias Krakel: Department of Economics, University of Bonn, Germany

International Journal of Business and Economics, 2006, vol. 5, issue 3, 185-199

Abstract: We discuss two incentive schemes that are frequently used in practice¡Xtournaments and piece rates. The existing literature on the comparison of these two incentive schemes has focused on the case of unlimited liability. However, real workers' wealth is typically restricted. Therefore, this paper compares both schemes under the assumption of limited liability. The results show that piece rates dominate tournaments if idiosyncratic risk is sufficiently high despite the partial insurance effect of tournament compensation.

Keywords: incentives; piece rates; rank-order tournaments (search for similar items in EconPapers)
JEL-codes: J31 J33 M5 (search for similar items in EconPapers)
Date: 2006
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