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Prices and Incentives: Towards a General Theory of Compensation and Competition

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Author Info
Barry J. Nalebuff
Joseph E. Stiglitz

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Abstract

This article analyzes the role of competitive compensation schemes (in which pay depends on relative performance) in economies and imperfect information. These compensation schemes have desirable risk, incentive, and flexibility properties; they provide for an automatic adjustment of rewards and incentives in response to common changes in the environment. When environmental uncertainty is large, such schemes are shown to be preferable to individualistic reward structures; in the limit, as the number of contestants becomes large, expected utility may approach the first-best (perfect information) level. We study the design of contests, including the optimal use of prizes versus punishments and absolute versus relative performance standards. The analysis can also be viewed as a contribution to the multiagent, single-principal problem.

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Publisher Info
Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 14 (1983)
Issue (Month): 1 (Spring)
Pages: 21-43
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Handle: RePEc:rje:bellje:v:14:y:1983:i:spring:p:21-43

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
  1. Joseph E. Stiglitz, 1990. "Incentives, Information, and Organizational Design," NBER Working Papers 2979, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Oriana Bandiera (STICERD & LSE, 2004. "Relative and Absolute Incentives: Evidence on Worker Productivity," Econometric Society 2004 North American Summer Meetings 277, Econometric Society. [Downloadable!]
    Other versions:
  4. Ajit Singh, 2002. "Competition and competition policy in emerging markets: international and developmental dimensions," ESRC Centre for Business Research - Working Papers wp246, ESRC Centre for Business Research. [Downloadable!]
  5. Riis, Christian, 2008. "Efficient Contests," MPRA Paper 10906, University Library of Munich, Germany. [Downloadable!]
  6. Hitoshi Matsushiima, 2006. "Relative Performance Evaluation between Multitask Agents," CIRJE F-Series CIRJE-F-419, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  7. Hitoshi Matsushima, 2003. "Multi-Group Incentives," CIRJE F-Series CIRJE-F-201, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  8. Joseph Stiglitz & Andrew Weiss, 1990. "Sorting Out the Differences Between Signaling and Screening Models," NBER Technical Working Papers 0093, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Dominique Demougin & Claude Fluet, 2003. "Inequity Aversion in Tournaments," Cahiers de recherche 0322, CIRPEE. [Downloadable!]
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  10. Baochun Peng, 2006. "On the Number of Contestants and Equilibrium Individual Effort," Topics in Theoretical Economics, Berkeley Electronic Press, vol. 6(1), pages 1305-1305. [Downloadable!] (restricted)
  11. Sangho KIM & Hyunjoon LIM & Donghyun PARK, 2007. "The Effect of Imports and Exports on Total Factor Productivity in Korea," Discussion papers 07022, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  12. Orrison, Alannah & Schotter, Andrew & Weigelt, Keith, 1997. "On the Design of Optimal Organizations Using Tournaments: An Experimental Examination," Working Papers 97-26, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  13. Matthias Kräkel, 2004. "Emotions and Incentives," Bonn Econ Discussion Papers bgse14_2004, University of Bonn, Germany. [Downloadable!]
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  14. Pegaret Pichler, 2004. "Optimal Contracts for Teams of Money Managers," Econometric Society 2004 North American Winter Meetings 495, Econometric Society. [Downloadable!]
  15. Braverman, Avishay & Guasch, J. Luis, 1989. "Rural credit in developing countries," Policy Research Working Paper Series 219, The World Bank. [Downloadable!]
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