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Title:Tournaments and piece rates revisited: A theoretical and experimental study of premium incentives PDF Logo
Authors:Güth, Werner
Levínský, René
Pull, Kerstin
Weisel, Ori
Issue Date:2010
Series/Report no.:Jena economic research papers 2010,039
Abstract:Tournaments represent an increasingly important component of organizational compensation systems. While prior research focused on fixed-prize tournaments, i.e., on tournaments where the prize or prize sum to be awarded is set in advance, we introduce a new type of tournament into the literature: premium incentives. While premium incentives, just like fixed-prize tournaments, are based on relative performance, the prize to be awarded is not set in advance but is a function of the firm's success: the prize is high if the firm is successful and low if it is not successful. Relying on a simple model of cost minimization, we are able to show that premium incentives outperform fixed-prize tournaments as well as piece rates. Our theoretical result is qualitatively confirmed by a controlled laboratory experiment and has important practical implications for the design of organizational incentive systems.
Subjects:Tournaments
Incentives
Economic experiments
JEL:C72
C91
J33
Document Type:Working Paper
Appears in Collections:Jena Economic Research Papers, MPI für Ökonomik

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