Why Pay for Jobs (and Not for Tasks)?

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.