Prizes and Incentives: Towards a General Theory of Compensation and Competition
Year: 1983
Type: article
Abstract: This article analyzes the role of competitive compensation schemes (in which pay depends on relative performance) in economies with imperfect information. These compensation schemes have desirable risk, incentive, and flexibility properties; they provide for an automatic adjustment of rewards and incentives in response to common changes in the environment. When environmental uncertainty is large, such schemes are shown to be preferable to individualistic reward structures; in the limit, as the number of contestants becomes large, expected utility may approach the first-best (perfect information) level. We study the design of contests, including the optimal use of prizes versus punishments and absolute versus relative performance standards. The analysis can also be viewed as a contribution to the multi-agent, single-principal problem.
Source: The Bell Journal of Economics
DOI: 10.2307/3003535
Authors: Barry J. Nalebuff, Joseph E. Stiglitz
Language: English
Field: Decision Sciences
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4251781751