AN EXPERIMENTAL INVESTIGATION OF ALTERNATIVE INCENTIVE SCHEMES WITH HETEROGENEOUS AGENTS

Experimental economics is used to compare tournaments (T) and fixed performance contracts (F) when agents have heterogeneous costs. Results suggest that: (1) There is no difference in average pooled effort across contracts, (2) high ability agents exert higher effort than low ability agents under both types of contracts, (3) average pooled earnings are affected by contract type, (4) high ability agents benefit from T whereas low ability agents are harmed by T, and (5) the difference in average pay between high and low ability agents is larger under T. Thus, T implement greater inequality.