Piece Rates vs. Contests in Product Market Competition

Manfred Stadler and Kerstin Pull

Review of Economics, 2015, vol. 66, issue 3, 273-287

Abstract: We study product market competition between firm owners (principals) where workers (agents) decide on their efforts and, hence, on output levels. Various worker compensation schemes are compared: a piece-rate compensation as a benchmark when workers’ output performance is verifiable, and different contest-based compensation schemes with fixed and variable prizes when it is only verifiable who the best performing worker is. Without rivalry between firms, all considered compensation schemes lead to the same outcome. In case of product market competition, however, a contest-based compensation scheme with revenue-dependent prizes leads to more employment, more production, and lower firm profits. The reason is that strategic interaction between the firm owners leads to an aggressive overinvestment in worker employment as well as in the revenue shares offered to the contest winners.

Keywords: worker compensation; piece rates; contests; product market competition (search for similar items in EconPapers)
JEL-codes: C72 L22 M52 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/roe-2015-1001

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