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Tournaments versus Piece Rates under Limited Liability

Author

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  • Kräkel, Matthias
Abstract
Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004The existing literature on the comparison of tournaments and piece rates as alternative incentive schemes has focused on the case of unlimited liability. However, in practice real workers’ wealth is typically restricted. Therefore, this paper compares both schemes under the assumption of limited liability. The results show that if the cost function is sufficiently convex, first-best effort will be more likely implemented under piece rates than under tournaments. Moreover, if first-best implementation is not achieved and workers earn positive rents, efforts and profits will be larger for piece rates than for tournaments given sufficiently convex costs. While tournaments offer a partial insurance due to their fixed prizes, piece rates may not work any longer if potential losses become prohibitively high. Finally, if risk is sufficiently high, piece rates will dominate tournaments despite the partial insurance effect of tournament compensation. Since effort costs and risk may depend on an individual worker’s characteristics, on the characteristics of his job and on his hierarchical position, these findings have important implications for the choice of incentive schemes and the allocation of workers in firms.

Suggested Citation

  • Kräkel, Matthias, 2004. "Tournaments versus Piece Rates under Limited Liability," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 15, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:15
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    File URL: https://epub.ub.uni-muenchen.de/13533/1/15.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. James W. Bono, 2008. "Sales contests, promotion decisions and heterogeneous risk," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(4), pages 371-382.
    2. Matthias Krakel, 2006. "Tournaments versus Piece Rates under Limited Liability," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 5(3), pages 185-199, December.
    3. Derek J. Clark & Kai A. Konrad, 2007. "Contests with Multi‐tasking," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 303-319, June.
    4. Czerny, Achim I. & Fosgerau, Mogens & Jost, Peter-J. & van Ommeren, Jos N., 2019. "Why pay for jobs (and not for tasks)?," Journal of Economic Behavior & Organization, Elsevier, vol. 168(C), pages 419-433.

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    More about this item

    Keywords

    incentives; limited liability; piece rates; rank-order tournaments;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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