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Incentives and compensation schemes: An experimental study

Agranov, Marina and Tergiman, Chloe (2013) Incentives and compensation schemes: An experimental study. International Journal of Industrial Organization, 31 (3). pp. 238-247. ISSN 0167-7187. doi:10.1016/j.ijindorg.2012.06.001.

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When the performances of agents are correlated (because of a common random component), contracts that use information on both the relative and absolute performances of agents theoretically outperform rank-order tournaments and piece-rate schemes. Although the theoretical advantage of such contracts has long been noticed in the literature, the empirical papers that study this question have produced mixed results. Using a controlled laboratory experiment, we shed light on the performance of these contracts. We focus on the simplest version of such a contract: the relative piece-rate (RPR) and compare its performance with that of the tournament and piece-rate schemes. We find that when the RPRs are imposed on the agents, they exert higher effort levels and give the principal (weakly) higher profits than the tournament and piece-rate contracts. Second, we find that agents have little aversion to self-select into the RPR scheme when other alternatives are available. In our paper we fix the environment agents face and vary only their wage scheme. Our results support the theoretical predictions and suggest that principals can benefit from using RPR schemes in places where the piece-rate and tournament contracts would otherwise be used.

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Additional Information:© 2012 Elsevier B.V. Available online 18 June 2012. We are particularly indebted to Guillaume Frechette and also Andrew Schotter for the time and guidance they generously gave us at every stage of this project. We thank Heski Bar-Isaac, Alessandro Lizzeri, Viktor Raskin, Mikael Rechtsman, Ariel Rubinstein, John Duffy, Charlie Holt, Tim Salmon and Lise Vesterlund for constructive criticism. The Center for Experimental Social Science at New York University provided us with the facilities and funds to conduct our experiments. We would also like to thank the participants and organizers of the following conferences: the French Economic Association on Behavioral Economics and Experiments in Lyon, the University of Amsterdam CREED, the World ESA meeting in Rome, and the North American ESA meeting in Arizona. Finally, we are very grateful to two anonymous referees for their many comments and useful suggestions.
Subject Keywords:Incentives; Compensation schemes; Laboratory experiments; Moral-hazard
Issue or Number:3
Classification Code:JEL classification: j33; M52; C91; D81; D23; L23; C72
Record Number:CaltechAUTHORS:20130711-092414935
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Official Citation:Marina Agranov, Chloe Tergiman, Incentives and compensation schemes: An experimental study, International Journal of Industrial Organization, Volume 31, Issue 3, May 2013, Pages 238-247, ISSN 0167-7187,
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:39302
Deposited By: Tony Diaz
Deposited On:12 Aug 2013 23:10
Last Modified:09 Nov 2021 23:43

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