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Competition and Incentives

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  • Schmidt, Klaus

    (University of Munich)

  • Fey, Lisa

    (University of Munich)

  • Thoma, Carmen

    (University of Munich)

Abstract

We report on two experiments that identify non-monetary incentive effects of competition. As the number of competitors increases, monetary incentives to engage in cost reduction tend to decrease. We test the hypothesis that there are non-monetary incentive effects of competition going in the opposite direction. In the experiments we change the number of competitors exogenously keeping the monetary incentives to spend effort constant. The first experiment shows that subjects spend significantly more effort in duopolistic and oligopolistic markets than in a monopoly. The second experiment focuses on social comparisons as one potential mechanism for this effect. It shows that competition turns the effort decisions of competing managers into strategic complements.

Suggested Citation

  • Schmidt, Klaus & Fey, Lisa & Thoma, Carmen, 2017. "Competition and Incentives," Rationality and Competition Discussion Paper Series 31, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:31
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    1. Xu, Jing, 2022. "Competition and equilibrium effort choice," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).

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    More about this item

    Keywords

    incentive effects of competition; behavioral industrial organization;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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