Eriksson, Tor Viking6; Poulsen, Anders4; Villeval, Marie Claire5
1 Department of Economics, Aarhus School of Business, Aarhus BSS, Aarhus University2 Center for Corporate Performance (CCP), Aarhus School of Business, Aarhus BSS, Aarhus University3 Department of Economics and Business Economics, Aarhus BSS, Aarhus University4 University of East Anglia5 GATE, University of Lyon II6 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
This paper experimentally investigates the impact of different pay and relative performance information policies on employee effort. We explore three information policies: No feedback, feedback given halfway through the production period, and continuously updated feedback about relative performance. The pay schemes are a piece rate payment scheme and a winner takes-all tournament. We find that the principal should not provide any information on relative performance, regardless of the pay scheme used, since feedback does not improve performance. Indeed, we do not find evidence of positive peer effects in the piece-rate pay scheme. In both pay schemes, interim feedback generates negative quality peer effects on the less able performers. We find however evidence of positive peer effects in the tournament scheme since the underdogs almost never quit the competition even when lagging significantly behind, and frontrunners do not slack off.