Technology Choice and Incentives under Relative Performance Schemes

Matthias Kräkel and Anja Schöttner

No 10/2010, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: We identify a new problem that may arise when heterogeneous workers are motivated by relative performance schemes: If workers’ abilities and the production technology are complements, the firm may prefer not to adopt a more advanced technology even though this technology would costlessly increase each worker’s productivity. Due to the complementarity between ability and technology, under technology adoption the productivity of a more able worker increases more strongly than the productivity of a less able colleague, thereby reducing the motivation of both workers to exert effort under a relative incentive scheme. We show that this adverse incentive effect is dominant and, consequently, keeps the firm from introducing a better production technology if talent uncertainty is sufficiently high and/or monitoring of workers is sufficiently precise.

Keywords: complementarities; heterogeneous workers; production technology; tournament (search for similar items in EconPapers)
JEL-codes: D82 D86 J33 M52 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (2)

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