Distribution,efficiency and incentives in organizations

This paper formulates incentives for individual workers in competitive firms in general equilibrium. Piece-rates and rewards for relative performance can elicit efficient effort in equilibrium, but workers benefit from collusion to reduce effort and consumption and expropriate capitalists by lowering the rental, while employers may choose equilibria with excessive ‘effort’. When there is uncertainty about true individual effort, prizes and limited penalties for best and worst performance can support efficient solutions, while income-risk declines as the size of the team grows. If penalties are prohibited, ex post inequality is multiplied and welfare declines.