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Setting Incentives: Temporary Performance Premiums versus Promotion Tournaments

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  • Volker Meier

Abstract

. Two alternative relative compensation schemes are compared with respect to the 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 is obtained because a promotion regime allows a distortion in a contest in favor of winners of previous contests.

Suggested Citation

  • Volker Meier, 2004. "Setting Incentives: Temporary Performance Premiums versus Promotion Tournaments," LABOUR, CEIS, vol. 18(4), pages 661-674, December.
    • Handle: RePEc:bla:labour:v:18:y:2004:i:4:p:661-674
    DOI: 10.1111/j.1121-7081.2004.00282.x
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    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
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