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Meier, Volker (2004): Setting incentives: Temporary performance premiums versus promotion tournaments. In: Labour, Vol. 18, No. 4: pp. 661-674

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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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