Competitive versus collective incentive pay: does workers mutual concern matter?

The paper shows that coworkers' mutual concern may help explain the puzzling fact that wage premia based on ranked or relative performances are rare among employees while group rewards are popular. A work environment is studied in which, when workers are selfish, the optimal effort-enhancing scheme is a labor contest with a single wage prize. It is shown that, in such an environment, when workers care about coworkers' material benefit, a group reward scheme is optimal . Besides, profit increases as workers' mutual concern increases, so it is in the interest of the firm to foster mutual concern among its employees