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Labour Incentive Schemes, Effort, and Market Outcomes in a Differentiated Duopoly with Simple Institutional Constraints

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  • Luciano Fanti
  • Nicola Meccheri

Abstract

This paper compares two alternative incentive schemes, performance-related pay (PRP) and relative performance evaluation (RPE), in a differentiated duopoly where institutional features constrain firms to pay workers a given salary. It is shown that RPE endogenously arises as the optimal choice by firms and outperforms PRP as regards overall output, profits, and social welfare. This holds true irrespective of the degree of product substitutability and the mode of competition (i.e., à la Cournot or à Bertrand). Moreover, under Cournot competition, RPE attains the same outcome of the classic agency model, where all wage components are chosen inside each employment relationship.

Suggested Citation

  • Luciano Fanti & Nicola Meccheri, 2012. "Labour Incentive Schemes, Effort, and Market Outcomes in a Differentiated Duopoly with Simple Institutional Constraints," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 168(2), pages 290-310, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201206)168:2_290:liseam_2.0.tx_2-a
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    References listed on IDEAS

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    1. Justus Haucap & Christian Wey, 2004. "Unionisation structures and innovation incentives," Economic Journal, Royal Economic Society, vol. 114(494), pages 149-165, March.
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    Cited by:

    1. Luciano Fanti & Domenico Buccella, 2018. "Social Welfare and Profit-Sharing Rule in a Unionised Duopoly with Profit Tax/Subsidy," Hacienda Pública Española / Review of Public Economics, IEF, vol. 226(3), pages 59-84, September.
    2. Luciano Fanti & Nicola Meccheri, 2013. "Managerial Delegation under Alternative Unionization Structures," LABOUR, CEIS, vol. 27(1), pages 38-57, March.
    3. Jiancai Pi & Zixin Li, 2024. "Relative performance evaluation and wage inequality," Manchester School, University of Manchester, vol. 92(3), pages 296-312, June.

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    More about this item

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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