Incentives and compensation schemes

An experimental study

Marina Agranov, Chloe Jeanne Tergiman

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

When the performances of agents are correlated (because of a common random component), contracts that use information on both the relative and absolute performances of agents theoretically outperform rank-order tournaments and piece-rate schemes. Although the theoretical advantage of such contracts has long been noticed in the literature, the empirical papers that study this question have produced mixed results. Using a controlled laboratory experiment, we shed light on the performance of these contracts. We focus on the simplest version of such a contract: the relative piece-rate (RPR) and compare its performance with that of the tournament and piece-rate schemes. We find that when the RPRs are imposed on the agents, they exert higher effort levels and give the principal (weakly) higher profits than the tournament and piece-rate contracts. Second, we find that agents have little aversion to self-select into the RPR scheme when other alternatives are available. In our paper we fix the environment agents face and vary only their wage scheme. Our results support the theoretical predictions and suggest that principals can benefit from using RPR schemes in places where the piece-rate and tournament contracts would otherwise be used.

Original languageEnglish (US)
Pages (from-to)238-247
Number of pages10
JournalInternational Journal of Industrial Organization
Volume31
Issue number3
DOIs
StatePublished - Jan 1 2013

Fingerprint

Information use
Wages
Compensation and Redress
Incentives
Piece rate
Experimental study
Profitability
Experiments
Tournament
Prediction
Rank-order tournaments
Laboratory experiments
Profit

All Science Journal Classification (ASJC) codes

  • Industrial relations
  • Aerospace Engineering
  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)
  • Strategy and Management
  • Industrial and Manufacturing Engineering

Cite this

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Incentives and compensation schemes : An experimental study. / Agranov, Marina; Tergiman, Chloe Jeanne.

In: International Journal of Industrial Organization, Vol. 31, No. 3, 01.01.2013, p. 238-247.

Research output: Contribution to journalArticle

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