Contests vs. Piece Rates in Product Market Competition

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URI: http://hdl.handle.net/10900/64218
http://nbn-resolving.de/urn:nbn:de:bsz:21-dspace-642180
http://dx.doi.org/10.15496/publikation-5640
Dokumentart: Aufsatz
Date: 2015-07-17
Source: University of Tübingen Working Papers in Economics and Finance ; 85
Language: English
Faculty: 6 Wirtschafts- und Sozialwissenschaftliche Fakultät
Department: Wirtschaftswissenschaften
DDC Classifikation: 330 - Economics
Keywords: Kompensation
Other Keywords:
Worker compensation
piece rates
team contests
revenue sharing
strategic competition
License: Publishing license excluding print on demand
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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.

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