Piece Rates vs. Contests in Product Market Competition
-
Manfred Stadler
and
Kerstin Pull
Abstract
We study product market competition between firm owners (principals) where workers (agents) decide on their efforts and, hence, on output levels. Various worker compensation schemes are compared: a piece-rate compensation as a benchmark when workers’ output performance is verifiable, and different contest-based compensation schemes with fixed and variable prizes when it is only verifiable who the best performing worker is. Without rivalry between firms, all considered compensation schemes lead to the same outcome. In case of product market competition, however, a contest-based compensation scheme with revenue-dependent prizes leads to more employment, more production, and lower firm profits. The reason is that strategic interaction between the firm owners leads to an aggressive overinvestment in worker employment as well as in the revenue shares offered to the contest winners.
Acknowledgements
Paper presented at seminars at the MPI Jena, the University of Augsburg and the 16th annual GEABA conference in Hamburg. The authors gratefully acknowledge comments of the seminar participants, especially Jörg Budde, Peter Jost, Laszlo Goerke, Werner Güth, Susanne Warning and Peter Welzel. Furthermore, we would like to thank an anonymous referee for helpful suggestions.
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Articles in the same Issue
- Frontmatter
- Quantity versus Price Bank Competition and Macroeconomic Performance Given Bank Concentration
- Piece Rates vs. Contests in Product Market Competition
- Superneutrality of Money under Open Market Operations
- Toll Road or Dumb Pipe? Economic Perspectives on Net Neutrality
Articles in the same Issue
- Frontmatter
- Quantity versus Price Bank Competition and Macroeconomic Performance Given Bank Concentration
- Piece Rates vs. Contests in Product Market Competition
- Superneutrality of Money under Open Market Operations
- Toll Road or Dumb Pipe? Economic Perspectives on Net Neutrality
