Contests vs. piece rates in product market competition

Kerstin Pull and Manfred Stadler

No 85, University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics

Abstract: We study product market competition between firm owners (principals) where workers (agents) decide on their efforts and, hence, on output levels. Two worker compensation schemes are compared: a piece rate compensation as a benchmark when workers' output performance is verifiable, and a contest-based compensation scheme with variable, revenue-based prizes when it is only verifiable who the best performing worker is, i.e., only 'contest performance' is verifiable.Without rivalry between firms, the two compensation schemes lead to the same results. In case of product market competition, however, contest-based compensation schemes lead to more employment, more production, and lower firm profits. The reduction in profits represents the cost of being only able to verify workers' contest performance instead of output performance.

Keywords: worker compensation; piece rates; team contests; revenue sharing; strategic competition (search for similar items in EconPapers)
JEL-codes: C72 L22 M52 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-bec, nep-com, nep-gth and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuewef:85

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