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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 total 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 occurs because a promotion regime allows distortion in a contest in favor of winners of previous contests.

Suggested Citation

  • Volker Meier, 2001. "Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments," CESifo Working Paper Series 432, CESifo.
    • Handle: RePEc:ces:ceswps:_432
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    References listed on IDEAS

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