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Piece Rates vs. Contests in Product Market Competition

Author

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  • Stadler Manfred

    (School of Business and Economics, University of Tübingen, Mohlstr. 36, D-72074 Tübingen, Germany)

  • Pull Kerstin

    (School of Business and Economics, University of Tübingen, Nauklerstr. 47, D-72074 Tübingen, Germany)

Abstract

We study product market competition between firm owners (principals) where workers (agents) decide on their efforts and, hence, on output levels. Various worker compensation schemes are compared: a piece-rate compensation as a benchmark when workers’ output performance is verifiable, and different contest-based compensation schemes with fixed and variable prizes when it is only verifiable who the best performing worker is. Without rivalry between firms, all considered compensation schemes lead to the same outcome. In case of product market competition, however, a contest-based compensation scheme with revenue-dependent prizes leads to more employment, more production, and lower firm profits. The reason is that strategic interaction between the firm owners leads to an aggressive overinvestment in worker employment as well as in the revenue shares offered to the contest winners.

Suggested Citation

  • Stadler Manfred & Pull Kerstin, 2015. "Piece Rates vs. Contests in Product Market Competition," Review of Economics, De Gruyter, vol. 66(3), pages 273-287, December.
    • Handle: RePEc:lus:reveco:v:66:y:2015:i:3:p:273-287
    DOI: 10.1515/roe-2015-1001
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    References listed on IDEAS

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    Cited by:

    1. Stadler, Manfred, 2020. "Worker compensation schemes and product market competition," University of Tübingen Working Papers in Business and Economics 128, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.

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    More about this item

    Keywords

    worker compensation; piece rates; contests; product market competition;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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