Relative performance pay in the shadow of crisis

Matthias Kräkel and Petra Nieken

European Economic Review, 2015, vol. 74, issue C, 244-268

Abstract: 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 might explain players׳ behavior.

Keywords: Crisis; Incentives; Strategic complements; Strategic substitutes; Tournament (search for similar items in EconPapers)
JEL-codes: C9 J3 J6 M5 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Relative Performance Pay in the Shadow of Crisis (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:74:y:2015:i:c:p:244-268

DOI: 10.1016/j.euroecorev.2014.12.002

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