Abstract We identify a new problem that may arise when heterogeneous workers are motivated by relative performance pay: if workers' abilities and the production technology are complements, the firm may prefer not to adopt a more advanced technology even though this technology would costlessly...

We show that establishing an internal labor market by offering combined contracts across hierarchy levels strictly dominates external recruitment when workers are homogeneous. The reason is that only an internal labor market can exploit higher tier rents for incentive provision on lower tiers....

External recruiting at least weakly improves the quality of the pool of applicants, but the incentive implications are less clear. Using a contest model, this paper investigates the pure incentive effects of external recruiting. Our results show that if workers are heterogeneous, opening up a...

We introduce a concept of emotions that emerge when agents compare their own performance with the performances of other agents. Assuming heterogeneity among the agents the interplay of emotions and incentives is analyzed within the framework of rank-order tournaments, which are frequently used...