Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments

Meier, Volker (2001): Setting Incentives: Temporary Performance Premiums Versus Promotion Tournaments. CESifo Working Paper,

Abstract

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

• Item Type: Paper
• Faculties: Economics; Economics > Chairs > Chair for Public Economics
• Subjects: 300 Social sciences > 330 Economics
• Language: English