International Journal of Business and Economics

International Journal of Business and Economics
Volume 5, No. 3

December, 2006
Tournaments versus Piece Rates under Limited Liability
Matthias Kräkel
Department of Economics, University of Bonn, Germany
We discuss two incentive schemes that are frequently used in practice—tournaments and piece rates. The existing literature on the comparison of these two incentive schemes has focused on the case of unlimited liability. However, real workers' wealth is typically restricted. Therefore, this paper compares both schemes under the assumption of limited liability. The results show that piece rates dominate tournaments if idiosyncratic risk is sufficiently high despite the partial insurance effect of tournament compensation.
Keywords:incentives, piece rates, rank-order tournaments.
JEL Classifications:J31, J33, M5.