Budget‐Based Contracts, Budget Levels, and Group Performance

In this paper, we experimentally investigate the effects of budget‐based contracts and budget levels (performance targets) on group performance. We compare a group piece‐rate contract with two different specifications of a group budget‐based contract: (1) a group budget‐fixed contract that provides no remuneration for performance below the budget and a fixed bonus for performance meeting or exceeding the budget, and (2) a group budget‐linear contract that provides no remuneration for performance below the budget, a fixed bonus once the budget is attained, plus a piece‐rate for production in excess of the budget. We also assigned each group a budget level, set at 50 percent, 75 percent, or 100 percent of the group's performance capability. The results indicate that the group budget‐linear contract led to significantly higher group performance than both the group budget‐fixed contract and the group piece‐rate contract. Additionally, the 75 percent budget level led to significantly higher group performance t...