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Meier, Volker
Year of Publication: 
Series/Report no.: 
CESifo Working Paper 432
Two alternative relative compensation schemes are compared with respect to total output that can be generated at a given sum of salaries. While the promotion regime guarantees that any salary increase is permanent, the premium system allows a reduction in the income of an agent to the base salary after one period. It is shown that the optimum promotion tournament system induces a higher total output than the optimum premium system. This result occurs because a promotion regime allows distortion in a contest in favor of winners of previous contests.
relative compensation
internal labor markets
Document Type: 
Working Paper

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