Motivation from an Economics Perspective © Nancy Brown Johnson, 2002

Tournament Model Assumptions Prizes fixed in advance Prizes independent of absolute performance (win for being better, but not good) Level of effort depends upon the prize for winning relative to losing (spread)

Corporation Pay of jobs established with position Promotion from within and dependent upon relative performance The higher the spread,  motivation There is a limit to the spread

Inference Motivation is a function of the increase in pay from obtaining a higher position

Level of Pay Pay level determines attraction Pay level affects costs Pay level needed to attract workers for extra effort

Luck (Noise) Caused by –production uncertainty (inability to control output) –random error (storm) Noise reduces probability of winning If all noise effort  0 Increasing spread helps prevent loss

Applications Salary structures in Japan v. US –Random factors in determining promotions in US –Younger –More variance in productivity

Two Compensation Structures Even Distribution (e.g., Japanese) Skewed (e.g., US) Level Salary

Multistage Tournament Two components of winning lower stage contests –prize from promotion –option value of continuing to next round Top of the ladder, option value gone –means you need a larger prize

Advantages of Tournaments Easier to observe relative performance –saves on measurement costs Relative compensation eliminates the effect of luck when everyone has the same luck (e.g., bad economy) Variation in luck (e.g., getting good supervisor) must be considered

Disadvantages of Tournaments Workers could collude to shirk & split winner’s prize. Reduced by having more workers in competition hiring externally Reduces worker cooperation Uneven distribution of ability causes workers to shirk (expectancy)

Comparison of Tournament with Expectancy Model Expectancy: uneven distribution of ability Instrumentality: Noise Valence: Spread

Industrial Politics

Problem of Enhancing Cooperation Tournaments reduce cooperation Could make cooperation part of the competition but difficult to do in practice

Hawks v. Doves Hawks: –aggressive, will take advantage Doves: –love peace, cooperative by nature

Worker Configuration by Personality

Doves v. Hawks Increasing the prize increases the motivation for not cooperating Workers should be segregated by personality type but they will not self- sort –aggressive individuals will tried to be paired with cooperative co-workers Separate compensation schemes must offered to doves than to hawks –doves you can give larger prizes –hawks must have lower spreads because of sabotage

Other Ways to Induce Cooperation Prize by teams Pay based on Team Output –free rider problem Reward for cooperation –manager must observe behavior –mutual monitoring

Other Issues in Industrial Politics Workers will tend to hire less competitive people when on a relative incentive scheme Top level of the firm may be populated by hawks, may wish to switch to a absolute incentive scheme