Setting Incentives: Temporary Performance Premiums versus Promotion Tournaments

  1. Volker Meier

Article first published online: 2 DEC 2004

DOI: 10.1111/j.1121-7081.2004.00282.x

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LABOUR

LABOUR

Volume 18, Issue 4, pages 661–674, December 2004

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How to Cite

Meier, V. (2004), Setting Incentives: Temporary Performance Premiums versus Promotion Tournaments. LABOUR, 18: 661–674. doi: 10.1111/j.1121-7081.2004.00282.x

Author Information

  1. Research Associate, Ifo Institute for Economic Research, Poschingerstr. 5, D-81679 Munich, Germany. Tel: +49(0)89-9224-1371; Fax: +49(0)89-9224-1608; E-mail: meier@ifo.de.

Publication History

  1. Issue published online: 2 DEC 2004
  2. Article first published online: 2 DEC 2004

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Abstract.  Two alternative relative compensation schemes are compared with respect to the 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 is obtained because a promotion regime allows a distortion in a contest in favor of winners of previous contests.

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