Absolute and relative performance-based incentive mechanism: Objective competition or subjective concerns?

This study proposes an absolute and relative performance evaluation (ARPE) framework integrating both objective (group size) and subjective (competition concern) incentives. In homogeneous settings, moderate competition increases effort and payoff, whereas excessive competition distorts incentives. Under multidimensional agent heterogeneity (i.e., efficiency, cost, risk aversion, and competition sensitivity), we find that optimal contracts offer greater incentives to more efficient and affordable agents. However, peer pressure may hinder the effort of such agents, and risk aversion may bolster competitive responses. Our results underscore the main interaction effects between agent characteristics and competitive structures, thus offering guidance for robust contract design in performance-driven environments.