Why Pay for Jobs (and Not for Tasks)?

24 Pages Posted: 20 Dec 2018 Last revised: 1 Sep 2019

See all articles by Achim Czerny

Achim Czerny

Hong Kong Polytechnic University - Faculty of Business

Mogens Fosgerau

University of Copenhagen

Peter J. Jost

WHU - Otto Beisheim School of Management - Chair of Theory of Organization

Jos N. van Ommeren

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: August 30, 2019

Abstract

Consider a principal who assigns a job with two tasks to two identical agents. Monitoring the agents' efforts is costly, therefore the principal rewards agents based on their (noisy) relative outputs. This paper addresses the question whether the principal should evaluate the outputs in each task separately and award two winner prizes, one for each task, or whether it would be better to award only one winner prize to the agent who performs best over the two tasks. There are two countervailing effects. First, a prize-diluting effect because, for a given budget, prizes will be smaller when there are two winner prizes relative to a situation where there is only one winner prize. The prize-diluting effect reduces the agents' incentives to invest in effort when there are two winner prizes. Second, a noise effect because the noisiness of the evaluation is reduced when there are two winner prizes. The main contribution of this paper is to show that the prize-diluting effect dominates the noise effect. Hence, in general, principals will pay prizes for combined tasks, and not for separate tasks. Several extensions are considered to test the robustness of this dominance result.

Keywords: tournaments; contests; multi-task environments; log-concavity; head starts

JEL Classification: D86; J33; M52

Suggested Citation

Czerny, Achim and Fosgerau, Mogens and Jost, Peter J. and van Ommeren, Jos N., Why Pay for Jobs (and Not for Tasks)? (August 30, 2019). Available at SSRN: https://ssrn.com/abstract=3294890 or http://dx.doi.org/10.2139/ssrn.3294890

Achim Czerny (Contact Author)

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Mogens Fosgerau

University of Copenhagen ( email )

University of Copenhagen, Building 26
Ă˜ster Farimagsgade 5
Copenhagen K., DK-1353
Denmark

Peter J. Jost

WHU - Otto Beisheim School of Management - Chair of Theory of Organization ( email )

Offentlichkeitsarbeit, Burgplatz 2
56179 Vallendar
Germany

Jos N. Van Ommeren

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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