Compensation Schemes and Labor Market Competition: Piece Rate versus Wage Rate


  • We would like to thank Debra Aron, Larry Ausubel, David Besanko, Ray Deneckere, Alejandro Manelli, John Roberts, and two anonymous referees for their comments. The authors also acknowledge partial financial support from the Spanish DGICYT.


We investigate the choice of compensation scheme by firms. Our basic model shows that the unique equilibrium choice for profit maximizing duopsonists in a labor market is for one firm to offer a wage rate and for the other to offer a piece rate. This result arises because the firms recognize that, by offering different compensation schemes, they induce self-selection among workers, which thereby decreases the intensity of competition in the labor market. We find this asymmetry to be robust to allowing for firing, free entry, and a class of more general compensation schemes. When we broaden our model to permit firms to be differentiated in the eyes of workers (either geographically or by “other working conditions,” e.g.), we find that our results are preserved when differentiation is low, but that both firms choose to offer a piece rate when differentiation is high.