Labour Incentive Schemes, Effort, and Market Outcomes in a Differentiated Duopoly with Simple Institutional Constraints

Luciano Fanti and Nicola Meccheri ()

Journal of Institutional and Theoretical Economics (JITE), 2012, vol. 168, issue 2, 290-310

Abstract: This paper compares two alternative incentive schemes, performance-related pay (PRP) and relative performance evaluation (RPE), in a differentiated duopoly where institutional features constrain firms to pay workers a given salary. It is shown that RPE endogenously arises as the optimal choice by firms and outperforms PRP as regards overall output, profits, and social welfare. This holds true irrespective of the degree of product substitutability and the mode of competition (i.e., à la Cournot or à Bertrand). Moreover, under Cournot competition, RPE attains the same outcome of the classic agency model, where all wage components are chosen inside each employment relationship.

JEL-codes: J33 J41 L13 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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