Relative Piece-Rate, Tournament and Independent Piece-Rate Schemes: An Experimental Study∗

When risk-averse agents ’ outputs are correlated, using relative perfor-mance information can improve the trade-off between incentives and risk-sharing. The experimental work that tests this idea has mainly focused on either rank-order tournaments, in which payment depends only on relative ranking, or independent piece-rates, which use only absolute performance information. Theoretically, however, the princi-pal can do better by designing a wage scheme that uses both the rel-ative and absolute performance of his agents. In this paper we study such a scheme in a controlled laboratory setting and find that as the theory predicts, it outperforms the tournament and the independent piece-rate. ∗We are eternally indebted to Guillaume Frechette and Andrew Schotter for the time and guidance they generously gave us at every stage of this project. We thank Hesk