Relative performance pay in the shadow of crisis

- We analyze the impact of a crisis on relative performance pay.
- Our model shows that a severe (minor) crisis decreases (increases) incentives.
- Our experimental findings confirm the ordinal ranking of workers׳ equilibrium efforts.
- In the lab, a severe crisis boosts efforts and a department׳s survival probability.

We analyze whether incentives from relative performance pay are reduced or enhanced if a department is possibly terminated due to a crisis. Our benchmark model shows that incentives decrease in a severe crisis, but are boosted given a minor crisis since efforts are strategic complements in the former case but strategic substitutes in the latter one. We tested our predictions in a laboratory experiment. The results confirm the effort ranking but show that in a severe crisis individuals deviate from equilibrium significantly stronger than in other situations. This behavior contradicts the benchmark model and leads to a five times higher survival probability of the department. We develop a new theoretical approach that might explain players׳ behavior.