Relative Performance Pay in the Shadow of Crisis

Matthias Kräkel and Petra Nieken

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: We analyze whether incentives from relative performance pay are reduced or enhanced if a department is possibly terminated due to a crisis. Our benchmark model shows that incentives decrease in a severe crisis, but are boosted given a minor crisis since efforts are strategic complements in the former case but strategic substitutes in the latter one. We tested our predictions in a laboratory experiment. The results confirm the effort ranking but show that in a severe crisis individuals deviate from equilibrium significantly stronger than in other situations. This behavior contradicts the benchmark model and leads to a five times higher survival probability of the department. We develop a new theoretical approach that may explain players’ behavior.

Keywords: crisis; incentives; strategic complements; strategic substitutes; tournament (search for similar items in EconPapers)
JEL-codes: C9 J3 J6 M5 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-exp, nep-hrm and nep-lab
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Citations: View citations in EconPapers (4)

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Journal Article: Relative performance pay in the shadow of crisis (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:425

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