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Free keywords:
Tournaments, Relative performance, Experiment, Principal-agent
JEL:
J3 - Wages, Compensation, and Labor Costs
JEL:
L2 - Firm Objectives, Organization, and Behavior
Abstract:
Tournaments represent an increasingly important component of organizational compensation systems. While prior research focused on fixed-prize tournaments where the prize to be awarded is set in advance, we introduce ‘output-dependent prizes’ where the tournament prize is endogenously determined by agents’ output—it is high when the output is high and low when the output is low. We show that tournaments with output-dependent prizes outperform fixed-prize tournaments and piece rates. A multi-agent experiment supports the theoretical result.
