bonus culture competitive pay screening and multitasking to analyze the impact of labor market competition on the structure of compensation we embed multitasking and screening within a hotelling framework competition for talent leads to an escalation of performance pay shifting effort away from long term investments risk management and cooperation efficiency losses can exceed those from a single principal who dulls incentives to extract rents as competition intensifies monopsonistic underincentivization of low skill agents first decreases and then gives way to growing overincentivization of high skill ones aggregate welfare is thus hill shaped while inequality tends to rise monotonically bonus caps can help restore balance in incentives but may generate other distortions

anatomy of a contract change we study the productivity impact of a contract change the setting is a tea plantation in india the activity in question is tea plucking the output of which is measurable and contractible payments to pluckers consist of a baseline wage along with piece rates per kilogram kg of output that vary over different production intervals in 2008 a contract change was instituted as part of a customary practice of renegotiation once every three years this plantation represented only a fraction of the negotiating parties which involved representatives from some 20 unions and large plantations operating in the tea growing region with no dominant players on either side of the table negotiations commenced a few months prior to the expiration of the going contract and went through several rounds the new contract increased the baseline wage by approximately 30 percent almost all of this increase was mandated by state government legislation in june 2008 the government announced a preliminary notification under the minimum wages act 1948 setting the minimum daily wage payable to plantation workers in the state at rs 102 us 2 25 the baseline in force in our plantation was at

the effects of human resource management practices on productivity a study of steel finishing lines the authors investigate the productivity effects of innovative employment practices using data from a sample of thirty six homogeneous steel production lines owned by seventeen companies the productivity regressions demonstrate that lines using a set of innovative work practices which include incentive pay teams flexible job assignments employment security and training achieve substantially higher levels of productivity than do lines with the more traditional approach which includes narrow job definitions strict work rules and hourly pay with close supervision their results are consistent with recent theoretical models which stress the importance of complementarities among work practices

incentives and transactions costs within the firm estimating an agency model using payroll records we estimate an agency model using the payroll records of a copper mine that paid a production bonus to teams of workers we estimate the cost of incomplete information due to insurance and incentives considerations and the inefficiency caused by the simple form of the incentive contract itself at the estimated parameters the cost of worker risk aversion insurance is of similar magnitude to moral hazard incentives overall incomplete information accounted for one half of the bonus system s inefficiency relative to potential full information profits the other half is attributed to the bonus system s inefficient generation of incentives and insurance relative to the optimal incentive contract

a tale of two collectives sulphur versus nitrogen oxides emission reduction in europe a theoretical model of emission reductions is specified that accounts for voluntary and non voluntary behaviour regarding the adherence to the helsinki and sofia protocols which mandated emission reductions for sulphur s and nitrogen oxides nox respectively from this model we derive an econometric specification for the demand for emission reductions that adjusts for the spatial dispersion of the pollutant when tested for 25 european nations the model performs well for sulphur cutbacks less satisfying results are obtained for nox because the model s assumption of a unitary actor at the national level is less descriptive collective action considerations indicate that sulphur emissions are easier to control than those of nox

mixed equilibria are unstable in games of strategic complements in games with strict strategic complementarities properly mixed nash equilibria equilibria that are not in pure strategies are unstable for a broad class of learning dynamics

assessing the case for social experiments rs ecent academic debates pit two alternative approaches to policy evaluation against one another the first is the experimental approach based on the random assignment of accepted program applicants to a recipient or treatment group and a non recipient or control group the second is the nonexperimental or econometric approach that uses a variety of microdata sources statistical methods and behavioral models to compare the outcomes of participants in social programs with those of nonparticipants the central question addressed in this paper is whether or not randomized social experiments aid in securing answers to basic questions about the evaluation of social programs there are many distinct and complementary approaches to the study of the impact of public policy including full general equilibrium analysis of policy impacts tinbergen 1956 auerbach and kotlikoff 1987 shoven and whalley 1992 kydland and prescott 1991 and less ambitious partial equilibrium microeconomic structural research programs such as those designed to estimate the impact of taxes on labor supply both approaches offer answers to many interesting counterfactual policy questions but their credibility rests critically on the quality of the empirical input used to generate their answers

piece rates for professors using panel data we demonstrate a 50 increase in research productivity following a dramatic increase in the piece rate paid for articles by a major chinese university the increased productivity comes exclusively from those who were already research active

the effect of wage subsidies on piece rate workers evidence from the penny per pound program in florida abstract this paper studies a fair trade program in which consumers provide a wage subsidy bonus to piece rate tomato pickers the total subsidy determined by sales to participating buyers is divided among workers based on their relative output a worker who produces more gets a larger share of the bonus although seemingly mimicking the existing piece rate pay scheme the mechanism associated with the bonus payment is really a relative performance evaluation as the size of total bonus is exogenous and invariant to workers effort therefore for a given sized subsidy the combined total or per worker average utility gains would become the largest if the workers keep their efforts at the pre program level empirical analysis shows that worker effort and hence productivity increases substantially in response to the program suggesting that currently workers combined gains per dollar of subsidy are not being maximized

compensation policy and worker performance identifying incentive effects from field experiments the role of field experiments in evaluating the effect of compensation policies on worker productivity is considered particular attention is paid to the ability of a field experiment to identify the effect of a permanent change in firm policy while field experiments solve endogeneity problems through randomization they do so within a specific and at times artificial environment that may not be replicated by a permanent policy change as such rather than providing a basis for the unrestricted identification of incentive effects experiments are better thought of as providing exogenous variation with which to identify structural parameters these parameters can in turn be used to predict the effects of policy changes jel j3 l2 c9

the response of worker effort to piece rates we measure the elasticity of worker effort with respect to changes in the piece rate using panel data collected from the payroll records of a british columbia tree planting firm our data contain information on daily worker productivity and the piece rate received over a five month period using a structural model to control for the endogeneity of the piece rate we estimate this elasticity to be approximately 2 14 we also calculate a nonstructural lower bound to this elasticity equal to 0 77 structural estimation also allows us to perform policy experiments and to compare firm profits under alternative compensation systems our results suggest that profits would increase by at least 17 percent were the firm to implement the optimal static contract as predicted by principal agent theory this increase in profits would be due to capturing worker rents after the revelation of private information over ability yet only a negligible proportion of these rents could be captured while inducing workers to reveal ability truthfully suggesting that dynamic considerations were important in determining the firm s actual choice of contract

an experimental study of incentive contracts for short and long term employees abstract motivated by real world observations of different contract offers we conduct a lab experiment to examine a principal s contract choice and agent effort in both long and short term employment relationships implemented as one shot and repeated games we find that a piece rate contract has the strongest incentive effect on short term agents effort and is the principals dominant choice nevertheless the bonus contract works almost as well as the piece rate contract for long term relationships but not so well for short term relationships in addition the bonus contract s effect on effort is mainly driven by the bonus component suggesting that a fixed wage alone is not an effective mechanism to improve workers performance

the acid rain differential game this paper considers an acid rain differential game countries emit sulphur which is partly transferred to other countries depositions above critical loads ultimately destroy the soil countries face a trade off between the costs of emission reductions and the damage to the soil due to the depletion of the acid buffers because of the transboundary externalities the outcome will depend on whether the countries cooperate or not this paper presents the cooperative outcome and the open loop and markov perfect nash equilibria of the acid rain differential game it will be shown that the depositions always converge to the critical loads but the steady state levels of the buffer stocks differ the theory is used to analyse the acid rain differential game for sulphur between great britain and ireland finally some results are given for the whole of europe

the role of career and wage incentives in labor productivity evidence from a two stage field experiment in malawi we study how career and wage incentives affect labor productivity through self selection and incentive effect channels using a two stage field experiment in malawi first recent secondary school g

the response of worker effort to piece rates evidence from the midwest logging industry using firm level payroll data from the midwest logging industry i compute a worker s productivity response to a change in piece rate pay an elasticity of effort using an empirical specification developed in paarsch and shearer 1999 maximum likelihood estimation of an agency based structural econometric model of worker choice yields elasticities ranging from 0 413 to 1 507 these estimates are smaller than but qualitatively similar to those reported in paarsch and shearer suggesting that their model has perhaps more general applicability than their british columbia tree planting example

avoiding invasives trade related policies for controlling unintentional exotic species introductions abstract international commodity trade serves as the primary conduit for unintentional introductions of damaging exotic species we use a simple model of contaminated goods trade to analyze the optimal mix of tariffs and inspections as means of controlling damage from this negative externality among other policy relevant results we find that 1 while it is always optimal to employ tariffs there are non trivial cases in which inspections should optimally be set to zero 2 a higher infection rate requires a higher tariff but beyond a point optimal inspections decrease in the infection rate and finally 3 taking a dynamic view and considering future effects of current introductions leads unambiguously to more stringent inspections but may give rise to higher or lower tariffs

the response to incentives and contractual efficiency evidence from a field experiment abstract we use data from a field experiment to estimate worker reaction to incentives and the optimality of piece rate contracts our estimate of the elasticity of output with respect to piece rates is 0 39 regression methods cannot predict performance under hypothetical contracts therefore we apply structural econometric methods without imposing profit maximization to evaluate observed contract optimality using profit as a metric we estimate the distance between observed and profit maximizing contracts to be negligible this suggests that observed contracts closely approximate optimal contracts under asymmetric information about worker ability under complete information the firm could increase expected profits by 14 percent keeping workers indifferent to the observed piece rate contract profits could increase between 44 and 49 percent if the firm exploited information about ability to reduce worker utility to the outside alternative

the role of sales agents in information disclosure evidence from a field experiment with a large nationwide retailer we run a natural field experiment to measure the effects of energy use information disclosure customer rebates and sales agent incentives on demand for energy efficient durable goods although a combination of large rebates plus sales incentives substantially increases market share information and sales incentives alone each have zero statistical effect and explain at most a small fraction of the low baseline market share sales agents strategically comply only partially with the experiment targeting information to more interested consumers but not discussing energy efficiency with the disinterested majority these results suggest that seller provided information is not a major barrier to energy efficiency investments at current prices in this context data as supplemental material are available at http dx doi org 10 1287 mnsc 2015 2327 this paper was accepted by john list behavioral economics

social comparison and effort provision evidence from a field experiment social comparison has potentially far reaching consequences in many economic domains we conducted a field experiment to examine how social comparison affects workers effort provision if their own wage or that of a co worker is cut workers were assigned to groups of two performed identical individual tasks and received the same performance independent hourly wage cutting both group members wages caused a decrease in performance but when only one group member s wage was cut the affected workers decreased their performance more than twice as much as when both workers wages were cut this finding indicates that social comparison among workers affects effort provision because the only difference between the two wage cut treatments is the other group member s wage level in contrast workers whose wage was not cut but who witnessed their group member s pay being cut displayed no change in performance relative to the baseline treatment in which both workers wages remained unchanged this indicates that social comparison exerts asymmetric effects on effort jel c93 j33 m53

optimal incentives for sequential production processes i study optimal incentive schemes in organizations where agents perform their tasks sequentially i consider a model in which agents effort decisions are mapped into the probability of the project s success an optimal investment inducing mechanism allocates rewards to agents so as to induce all of them to exert effort in equilibrium at minimal cost to the principal i characterize the unique optimal mechanism in several versions of my benchmark model i also address the problem of allocating individuals with diverse qualifications to different slots of the production process as well as allocating tasks of different importance across different agents copyright 2006 rand

do professionals choke under pressure high rewards or the threat of severe punishment provide strong motivation but also create psychological pressure which might induce performance decrements by analyzing the performance of professional football players in penalty kick situations the paper provides empirical evidence for the existence of detrimental incentive effects two pressure variables are considered in particular 1 the importance of success and 2 the presence of spectators there are plenty of situations in which pressure arises in the workplace knowing how individuals perform under pressure conditions is crucial because it has implications for the design of the workplace and the design of incentive schemes

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

do women react differently to incentives evidence from experimental data and payroll records abstract we consider the response to incentives as an explanation for observed productivity differences within a firm that paid its workers piece rates we provide a framework within which the observed productivity differences can be decomposed into two parts one due to differences in ability and the other due to differences in the response to incentives we apply this decomposition to male and female workers from a tree planting firm in british columbia canada our evidence both experimental and nonexperimental suggests that there was no difference in the reaction to incentives between male and female planters the productivity differential male planters enjoyed arose because of differences in ability interpreted as strength in our application

gift giving and worker productivity evidence from a firm level experiment abstract we present results from a field experiment designed to measure worker response to a monetary gift from their employer the experiment took place inside a tree planting firm paying its workforce incentive contracts firm managers told a crew of tree planters they would receive a pay raise for one day as a result of a surplus not attributable to past planting productivity we compare planter productivity the number of trees planted per day on the day the gift was handed out with productivity on previous and subsequent days of planting on the same block and thus under similar planting conditions we find direct evidence that the gift had a significant and positive effect on daily planter productivity controlling for planter fixed effects weather conditions and other random daily shocks

fair wages and effort evidence from a field experiment the presence of workers who reciprocate higher wages with greater effort can have important consequences for firms and labor markets knowledge about the extent and determinants of reciprocal effort choices is however incomplete we investigate the role of fairness perceptions and social preferences in a field experiment in which workers were hired for a one time job we show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases whereas those who feel adequately paid or overpaid at the base wage do not change their performance moreover we find that only the workers who display reciprocity in a choice experiment show reciprocal effort responses in the field the workers who lack reciprocity in the choice experiment do not respond to the wage increase even if they feel underpaid at the base wage our findings suggest that fairness perceptions and social preferences are key in workers performance response to wage increases in our study the wage increase affects effort mainly through the removal of perceived unfairness i e the elimination of negative reciprocity toward the firm rather than positive reciprocity these results are the first direct evidence of the fair wage effort hypothesis in the field and also help interpret previous contradictory findings in the literature

piece rates fixed wages and incentives evidence from a field experiment data from a field experiment are used to estimate the gain in productivity that is realized when workers are paid piece rates rather than fixed wages the experiment was conducted within a tree planting firm and provides daily observations on individual worker productivity under both compensation systems unrestricted statistical methods estimate the productivity gain to be 20 since planting conditions potentially affect incentives structural econometric methods are used to generalize the experimental results to out of sample conditions the structural results suggest that the average productivity gain outside of the experimental conditions would be at least 21 7

incentives and discrimination optimal incentive mechanisms may require that agents are rewarded differentially even when they are completely identical and are induced to act the same we demonstrate this point by means of a simple incentive model where agents decisions about effort exertion is mapped into a probability that the project will succeed we give necessary and sufficient conditions for optimal incentive mechanisms to be discriminatory we also show that full discrimination across all agents is required if and only if the technology has increasing return to scale in the non symmetric framework we show that negligible differences in agents attributes may result in major differences in rewards in the unique optimal mechanism this abstract was borrowed from another version of this item

the incentive effects of tournaments revisited evidence from the european pga tour this analysis of data from the 1987 european men s professional golf association pga tour strongly supports the hypothesis that the level and structure of prizes in pga tournaments influence players performance specifically players performance appears to vary positively with both the total money prizes awarded in a tournament and the marginal return to effort in the final round of play a value that varies among players largely depending on how the prize money is allocated among finishers of different ranks the authors suggest that these results together with the similar results of their earlier study of the 1984 u s men s pga tour may have implications for the design of compensation systems for certain groups of workers such as corporate executives college professors and salespeople

implicit contracts incentive compatibility and involuntary unemployment this paper considers the enforceability of employment contracts when employees performance cannot be verified in court so that piece rate contracts are not legally enforceable part i shows that there exists a variety of self enforcing implicit contracts modelled as perfect equilibria in a repeated game and characterizes all the wage and performance outcomes that can be implemented implementation requires a strictly positive surplus from employment the form of the contract depending on how this surplus is divided between firm and employee piece rate contracts and contracts with an informally agreed bonus can be made self enforcing but the use of severance pay and bonding does not extend the set of implementable allocations the resulting contracts resemble actual labor contracts more than do the contracts in standard principal agent models part ii analyses market equilibrium with these contracts also modelled as perfect equilibria in a repeated game and shows that many such equilibria exist unfilled vacancies and unemployed workers can co exist despite the existence of contracts that are potentially mutually beneficial for those jobs that are filled any division of the potential surplus is possible so that the market can have at the same time involuntary unemployment and vacancies that are unfilled despite filled jobs earning positive profits as a criterion for selecting equilibria a notion of renegotiation proofness is applied then either all workers are employed or all jobs filled but any division of the potential surplus is still possible the paper explores what further restrictions on beliefs give rise to a walrasian outcome in which all the potential surplus goes to the short side of the market and to an efficiency wage type outcome in which the potential surplus goes to the long side

equilibrium wage and dismissal processes i develop and estimate an equilibrium model of the labor market in which inefficient employees are systematically eliminated from the sector of the market characterized by asymmetric information and moral hazard systematic selection on the distribution of productivity characteristics produces wage sequences that are increasing in tenure for employees never previously terminated even in the absence of long term contracting between employees and individual firms i provide sufficient conditions for there to exist a unique termination contract type of equilibrium and i estimate the equilibrium model using microlevel data from the national longitudinal survey of youth panel

the suite smell of success personnel practices and firm performance the authors use a panel of more than 1 500 new zealand firms from a diverse range of industries to examine how the adoption of human resource management hrm practices affects firm performance the panel is based on managerial responses to mandatory surveys of management practices in 2001 and 2005 administered by the national statistical office linked to objective longitudinal firm performance data the authors find that after controlling for time invariant firm characteristics and changes in a wide range of business practices and firm developments a suite of general hrm practices has a positive impact on firm labor and multifactor productivity conversely these practices tend to have no effect on profitability in part because the adoption of performance pay systems raises average wages in the firm

high powered contracts self selection and welfare in settings with externalities we extend the experimental analysis of sorting and effort effects of high powered contracts on welfare to situations with negative externalities participants solve brainteasers from raven s matrices the difference between right and wrong answers represents our measure of welfare per capita we compare two contract schemes fixed wage and bonus contracts that reward subjects for the number of correct answers regardless of the number of wrong answers with fixed wages selfish individuals have no effort incentive with bonuses they have incentives to answer as many questions as possible the two contract schemes are further separated depending on whether participants self select or are randomly assigned to a contract the self selection treatments correspond to cases where countries do not regulate contracts the random assignment treatments mimic situations where countries either offer only bonuses or ban them we find that bonuses generate lower welfare per capita than fixed wages as the higher effort incentives are outweighed by the detrimental effect of answering too many questions however due to productivity sorting a general ban on bonuses does not increase welfare per capita compared to offering both contract schemes

how trade politics affect invasive species control abstract trade has become the main mode of transport for many invasive species including diseases and agricultural pests most species are brought to their new homes unintentionally which constitutes a market failure rooted in international trade unless it is practical to drive invasion risk to zero the external costs may justify a tariff in this paper we analyze the political process likely to govern the formation of tariffs so justified using a straightforward incorporation of an invasive species externality into grossman and helpman s gh well known political economy model we show that our measure of disguised protectionism the gap between the optimal tariff and that set in the equilibrium of the political economy game is equal to the tariff that would be set if there were no invasive species and no international disciplines on trade policy the informational needs required to distinguish disguised protectionism from legitimate public goods protection are formidable

observing unobservables identifying information asymmetries with a consumer credit field experiment information asymmetries are important in theory but difficult to identify in practice we estimate the presence and importance of hidden information and hidden action problems in a consumer credit market using a new field experiment methodology we randomized 58 000 direct mail offers to former clients of a major south african lender along three dimensions i an initial offer interest rate featured on a direct mail solicitation ii a contract interest rate that was revealed only after a borrower agreed to the initial offer rate and ii a dynamic repayment incentive that was also a surprise and extended preferential pricing on future loans to borrowers who remained in good standing these three randomizations combined with complete knowledge of the lender s information set permit identification of specific types of private information problems our setup distinguishes hidden information effects from selection on the offer rate via unobservable risk and anticipated effort from hidden action effects via moral hazard in effort induced by actual contract terms we find strong evidence of moral hazard and weaker evidence of hidden information problems a rough estimate suggests that perhaps 13 to 21 of default is due to moral hazard asymmetric information thus may help explain the prevalence of credit constraints even in a market that specializes in financing high risk borrowers

salaries or piece rates on the endogenous matching of harvest workers and crops the objective of this paper is to determine whether the choice of payment schemes hourly vs piece rates is systematically related to the workers risk aversion and ability we derive the equilibrium relationship between agents risk aversion and ability and the power of incentives payment scheme in a market where many heterogeneous principals and agents are endogenously matched the equilibrium matching between principals and agents depends on the traits and is critical in determining the contract choice using confidential data from the national agricultural workers survey naws we find evidence of matching between agricultural workers and the riskiness of their jobs crops they harvest based on workers risk aversion and no matching based on ability when controlling for matching we find strong evidence that high risk averse workers choose hourly rates and low risk averse workers choose piece rates we also found that high ability types choose piece rates and low ability types choose hourly rates but the evidence is weaker jel j33 d82 q12

scaling for economists lessons from the non adherence problem in the medical literature economists often conduct experiments that demonstrate the benefits to individuals of modifying their behavior such as using a new production process at work or investing in energy saving technologies a common occurrence is for the success of the intervention in these small scale studies to diminish substantially when applied at a larger scale severely undermining the optimism advertised in the original research studies one key contributor to the lack of general success is that the change that has been demonstrated to be beneficial is not adopted to the extent that would be optimal this problem is isomorphic to the problem of patient non adherence to medications that are known to be effective the large medical literature on countermeasures furnishes economists with potential remedies to this manifestation of the scaling problem

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

gender differences in motivational crowding out of work performance this paper shows that prior financial incentives induce a crowding out effect when incentives are discontinued in our real effort experiment workers receive a piece rate before monetary incentives are substituted by a one time payment in this case workers performance significantly drops when receiving the one time payment the effect is driven by a fraction of men who reduce effort substantially whereas women constantly perform well we find that this motivational crowding out effect disappears when men do not have prior experience of a piece rate in a series of control treatments we discard several alternative explanations besides motivational crowding out jel c91 j16 m54

playing for keeps pay and performance in the nba i introduction a basic insight of agency theory is that properly designed incentive contracts can align the interests of agents with those of the principal and recent empirical work shows that workers do indeed respond to financial incentives 1 contractual incentives however are not the only force motivating workers workers also have incentives to vary effort at different points of their contract cycle to increase effort just before a new contract is signed to lock in a more lucrative deal and then reduce it after a multi year contract is secured these types of contract related incentives create clear moral hazard problems but have received little empirical attention the motivating hypothesis in this paper is that imperfect information and multi year contracts create an implicit incentive for workers to strategically alter effort over the contract cycle in the year prior to signing the contract their contract year workers may exert above average effort to convince employers that they are high quality and thus raise long term compensation once the contract is signed however workers may exert less effort because wages are effectively independent of contemporaneous performance an empirical difficulty is that this moral hazard may be obscured by two factors a selection effect may lead only high quality workers to receive contracts and career concerns may provide additional incentives and dampen the post contract decline 2 this paper employs a unique dataset for professional basketball players in the national basketball association nba from 1988 to 2002 to examine the contract related incentive effects the data include contract information year signed length of contract and value of contract for every active player in 2000 and performance measures points scored rebounds assists etc throughout each player s career contract related incentive effects are estimated from changes in individual performance over the contract cycle if performance systematically improves just before signing a new contract and falls afterward some of the fluctuation is likely due to contract related incentives i also examine the traditional link between pay and past performance which is necessary for these types of incentives to be relevant the critical advantage of this data is the detailed information on individual performance individual contract status and individual pay 3 in contrast previous work on individual incentives for example lazear 2000 paarsch and shearer 2000 and shearer 2004 studied changes infirmwide compensation plans while the empirical literature on executive pay and performance for example murphy 1985 1986 jensen and murphy 1990 gibbons and murphy 1992 kaplan 1994 and hall and liebman 1998 typically examined the link between individual pay and firm performance the individual level data constructed here have the critical variation across individuals which is needed to identify the impact of these contract related incentive effects the empirical work begins with a test of the link between pay and performance which is necessary for contract related incentives to be operational not surprisingly better performers in the nba are rewarded with higher salaries and longer contracts more relevant to the incentive issue players are strongly rewarded for improvements in performance in their contract year a one point increase in a player s scoring average for example is associated with an annual salary increase of over 300 000 this link provides the crucial motivation for the hypothesis that players will exert additional effort in their contract year to lock in the better contracts that they expect to follow the data then provide strong evidence of contract related incentive effects as overall performance does in fact improve relative to a player s long run average in the contract year and then declines after a long run contract is signed

carrots that look like sticks toward an understanding of multitasking incentive schemes constructing compensation schemes for effort in multidimensional tasks is complex particularly when some dimensions are not easily observable when incentive schemes contractually reward workers for easily observed measures such as quantity produced the standard model predicts that unrewarded dimensions such as quality will be neglected yet there remains mixed empirical evidence in favor of this standard principal agent model prediction this article reconciles the literature using both theory and empirical evidence the theory outlines conditions under which principals can use a piece rate scheme to induce higher quantity and quality levels than analogous fixed wage schemes making use of a series of complementary laboratory and field experiments we show that this effect occurs because the agent is uncertain about the principal s monitoring ability and the principal s choice of a piece rate signals to the agent that she is efficient at monitoring

homogenous and heterogenous contestants in piece rate tournaments theory and empirical analysis in this article we show that sorting different ability contestants in piece rate tournaments into more homogenous groups alters agents incentives to exert effort we propose a method for structurally estimating the piece rate tournament game with heterogenous players and apply it to the payroll data from a broiler production contract our counterfactual analysis shows that under reasonable assumptions both the principal and the growers can gain when the tournament groups are heterogenized this business strategy could be difficult to implement in real life settings however this article has supplementary material online

piece rates fixed wages and incentive effects statistical evidence from payroll records we develop and estimate an agency model of worker behavior under piece rates and fixed wages the model implies optimal decision rules for the firm s choice of a compensation system as a function of working conditions our model also implies an upper and lower bound to the incentive effect the productivity gain realized by paying workers piece rates rather than fixed wages that can be estimated using regression methods using daily productivity data collected from the payroll records of a british columbia tree planting firm we estimate these bounds to be an 8 8 and a 60 4 percent increase in productivity structural estimation which accounts for the firm s optimal choice of a compensation system suggests that incentives caused a 22 6 percent increase in productivity however only part of this increase represents valuable output because workers respond to incentives in part by reducing quality

piece rates principal agent models and productivity profiles parametric and semi parametric evidence from payroll records this paper uses data on the wages received by piece rate workers to estimate worker productivity profiles the data were collected from the payroll records of a british columbia copper mine the advantage of these data is the close link between observed wages and worker productivity an explicit model is used to control for worker effort as a function of observable worker characteristics and the parameters of the compensation system the model implies a censored wage distribution the parameters of which can be estimated using well known econometric techniques semi parametric estimation allows for the relaxation of the distributional assumptions of the model results suggest that while productivity profiles were increasing concave functions of tenure they were also very flat i relate these results to historical arguments on the skill saving nature of technological change in the mining industry at the end of the nineteenth century

intraday management of bank reserves the effects of caps and fees on daylight overdrafts the federal reserve system imposes caps and charges fees on the negative intraday balances in banks reserve accounts i e on daylight overdrafts our empirical results suggest that caps alone did little to reduce daylight overdrafts in the aggregate by contrast the 1994 imposition of fees reduced the average daily maximum overdraft on the fedwire system by about 93 billion and the average aggregate overdraft at any time during the day by about 43 billion we also found statistical evidence that higher beginning of day reserve balances lower aggregate dollar values of securities related transfers over fedwire and lower shares of banks assets funded with federal funds and repurchase agreements reduced daylight overdrafts copyright 1996 by ohio state university press

identifying and testing models of managerial compensation this article analyses the identification and empirical content of the pure moral hazard pmh and the hybrid moral hazard hmh principal agent models the pmh model has hidden actions while the hmh model has hidden information in addition to hidden actions in both models agents are risk averse and principals are risk neutral the article derives the equilibrium restrictions from the optimal contract and uses the restrictions to show that the models have empirical content for any given risk aversion parameter the models other parameters are non parametrically point identified the risk aversion parameter and hence the model are however only partially identified management s ability to manipulate accounting reports arises endogenously within hmh models but not in all versions of pmh models we use our framework to investigate whether shareholders contract with management recognizing that accounting reports are susceptible to manipulation and therefore endogenous to the incentives offered to management the data reject all models in which accounting reports are verifiable furthermore the version of the pmh in which accounting reports can be manipulated is rejected if expected compensation is restricted to be positive

how performance incentives shape individual exploration and exploitation evidence from microdata the existing literature has highlighted the role of individuals in exploration and exploitation yet our understanding of what shapes those activities at the individual level remains limited we integrate the literatures on exploration exploitation and incentives to examine how incentives impact individual behavior to explore new ideas or exploit existing ideas using novel microdata on the commercial projects of sales employees at a south korean e commerce firm we find that individuals engage in relatively more exploration when performance based incentives are weakened yet interestingly this increase in exploration is driven mainly by high performing individuals in our setting weakening performance based incentives also lead to higher exploration performance via experiential learning especially for individuals who work in complex task environments overall this study contributes to the literature on exploration exploitation by examining how individual exploration and exploitation behavior and performance is shaped by incentives we also contribute to the incentives literature by investigating the implications of incentives in an important domain namely that of knowledge exploration behavior this study also provides insights into important individual level microfoundations of firm capabilities and performance by highlighting the important role of individuals in exploration exploitation activities and how this role is contextualized by the incentives a firm deploys

evidence on incentive effects of subjective performance evaluations the authors investigate the effect of managerial performance evaluation styles on employee work effort using panel data on 4 080 employees in a swiss unit of an international company for the period 1999 2002 they test two hypotheses using paid and unpaid overtime work as effort indicators the company applies two performance based remuneration mechanisms an individual surprise bonus and one in which salary is affected by the extent to which an individual has reached personalized targets the authors hypothesize that effort is higher in departments in which individual performance evaluations are more flexible over time as well as when surprise bonuses are used more frequently both hypotheses are supported and the estimated effects are substantial increases in rating flexibility or bonus payments by one standard deviation above the mean increase average overtime hours by more than 20 the findings are robust and suggest that surprise bonuses and flexible performance evaluations over time provide ef

corporate philanthropy and productivity evidence from an online real effort experiment contributing to a social cause can be an important driver for workers in the public and nonprofit sectors as well as in firms that engage in corporate philanthropy or other corporate social responsibility policies this paper compares the effectiveness of a social incentive that takes the form of a donation received by a charity of the subject s choice to a financial incentive we find that social incentives lead to a 13 rise in productivity regardless of their form lump sum or related to performance or strength the response is strong for subjects with low initial productivity 30 whereas high productivity subjects do not respond when subjects can choose the mix of incentives half sacrifice some of their private compensation to increase social compensation with women more likely to do so than men furthermore offering subjects some discretion in choosing their own payment schemes leads to a substantial improvement in performance comparing social incentives to equally costly increases in private compensation for low productivity subjects reveals that the former are less effective in increasing productivity but the difference is small and not statistically significant data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 1985 this paper was accepted by uri gneezy behavioral economics

what field experiments have and have not taught us about managing workers this paper reviews the field experimental evidence on firm employee relationships there is strong evidence that output rises in response to financial incentives but more mixed support for worker reciprocity in response to employer generosity non financial approaches such as worker recognition or adding meaning to mundane tasks can also increase output social relations are central to how firms function and have been shown to have an important impact on the design of incentive schemes what we do not know however far exceeds that which we have learned a broad swathe of important topics including recruiting worker promotion and training are virtually untouched thus far by field experiments

biosecurity incentives network effects and entry of a rapidly spreading pest abstract protection against pest invasion is a public good yet the nature of private incentives to avoid entry is poorly understood this work shows that due to increasing returns or network effects private actions to avoid entry are strategic complements this means that compulsory action at least by a subset of parties can be an effective policy both heterogeneity in biosecurity costs and the effect of private actions on the extent of the invasion threat are shown to have ambiguous effects on the magnitude of welfare loss due to strategic behavior communicated leadership by some party is preferred to simultaneous moves and it may be best if the party with highest biosecurity costs assumes a leadership role

incentives performance and choking in darts this paper examines how within match variation in incentives affects the performance of darts players the game of darts offers an attractive naturally occurring research setting because performance can be observed at the individual level and without obscuring effects of risk considerations and behavior of others we analyze four data sets covering a total of 29 381 darts matches of professional amateur and youth players we find that amateur and youth players display a sizable performance decrease at decisive moments professional players appear less susceptible of such choking under pressure our results speak to a growing literature on the limits of increasing incentives as a recipe for better performance

introduction do compensation policies matter excerpt the papers in this volume should give the reader a sense of the exciting empirical research that has recently taken place on compensation related issues as a set these papers considerably expand our empirical evidence on the effects of compensation policies several papers show that executive compensation is structured in a way that at least implicitly ties executive compensation changes to measures of corporate performance and crucially that doing so leads to improved corporate performance leonard murphy gibbons abowd others show that compensation systems that pay workers for performance in the sense of providing explicit or implicit incentives for high levels of performance can motivate individuals to increase their effort levels ehrenberg bognanno hamermesh asch kahn sherer still others show that high wage policies do have some of the effects that proponents of efficiency wage theories claim for them krueger groshen holzer finally one shows that profit sharing plans appear at least weakly to increase employment stability chelius smith

field experiments in the developed world an introduction field experiments represent a relatively new area in economics to understand the causal links from one variable to another they have been used by academics to help answer interesting and policy relevant questions in the developed world relating to educational attainment tax avoidance consumer finance negative externalities charitable giving and labour market contracts in this paper we bring together the key ideas behind the different variants of field experiments how field experiments have been used to test theory their limitations and the new areas currently being opened up by field experiments

higher and higher performance pay and wage inequality in germany performance pay is of growing importance to the wage structure as it applies to a rising share of employees at the same time wage dispersion is growing continuously this leads to the question of how is the growing use of performance pay schemes related to the increase in wage inequality german socio economic panel soep data for the years 1984 2009 confirm the large increase in the application of performance pay schemes this in turn led to an upward shift of the wage distribution by about one log point however it did not contribute to the growth in wage inequality even though wage inequality grew within the group of employees who receive performance pay it grew even more so within the group who do not still the wage difference between both wage schemes remained flat over the distribution the empirical analysis employs sequential decompositions in a quantile regression framework

income targeting and farm labor supply there is considerable anecdotal evidence that farm workers who are paid by piece rate tend to income target or work only until they achieve a certain amount of daily income and then stop work we estimate reduced form and structural models derived from the reference dependent preference model of koszegi and rabin 2006 to test the income targeting hypothesis using data from the national agricultural workers survey naws we find evidence that supports the income targeting hypothesis in both the reduced form and structural econometric models our findings suggest that even higher piece rates may not help the widely reported shortage of agricultural labor on the intensive margin as labor supply curves can be backward bending

human resource management policies and productivity new evidence from an econometric case study first we distinguish various approaches used by economists to assess the impact of human resource management practices on productivity and then we briefly review and illustrate studies that represent different approaches in the main part of the paper we illustrate the econometric case study method by using new data to analyse a case from retail trade and by emulating an approach used in an earlier study consistent with theory we find that when employees have opportunities to participate to receive appropriate information and pertinent rewards a one standard deviation increase of the first principal component score would increase productivity by 1 our findings imply that there are benefits to innovative work practices even in settings where employees do simple tasks and employees are relatively low skilled since our findings are similar to those contained in a previous study our results also indicate the value of replication studies

sorting incentives and risk preferences evidence from a field experiment abstract we conducted experiments within a firm to measure the risk preferences of workers who face substantial daily income risk we find that these workers are significantly more risk tolerant than individuals from the broader population this is consistent with sorting risk tolerant workers are attracted to high risk occupations

self protection strategic interactions and the relative endogeneity of disease risks self protection is a key behavior that influences infectious disease risks spillovers in disease protection create different types of strategic interactions under certain conditions multiple nash equilibria may arise with the possibility of coordination failure involving excessively low self protection in which case individuals expectations of others efforts determine which outcome arises in prior studies assumed technical relations between self protection and infection probabilities drove the strategic interactions we demonstrate that strategic relations can be endogenously determined and depend on the relative endogeneity of risk rer defined here as the degree to which individuals can take control of their own risks in a strategic setting the potential for coordination failure may arise when rer is sufficiently small whereas larger levels of rer may eliminate this possibility to ensure larger levels of self protection we find that imposing a behaviorally dependent indemnity may increase rer to eliminate the possibility of coordination failure we apply our analysis to the problem of livestock disease and illustrate the theory using a numerical example of the 2001 united kingdom foot and mouth disease epidemic

on the relevance and composition of gifts within the firm evidence from field experiments we investigate the economic relevance and the composition of gifts within a firm where output is contractible we develop a structural behavioral model that identifies workers optimal reaction to monetary gifts received from their employer we estimate the model using data from two separate field experiments conducted within a tree planting firm we use the estimated structural parameters to generalize beyond the experiment simulating how workers would react to different gifts on the part of the firm within different labor market settings we find that gifts have a role to play within this firm increasing in importance when the workers outside alternatives deteriorate profit maximizing gifts would increase profits within slack labor markets by up to 10 on average and by up to 17 for certain types of workers

rationalizability learning and equilibrium in games with strategic complementarities we study a rich class of noncooperative games that includes models of oligopoly competition macroeconomic coordination failures arms races bank runs technology adoption and diffusion r d competition pretrial bargaining coordination in teams and many others for all these games the sets of pure strategy nash equilibria correlated equilibria and rationalizable strategies have identical bounds also for a class of models of dynamic adaptive choice behavior that encompasses both best response dynamics and bayesian learning the players choices lie eventually within the same bounds these bounds are shown to vary monotonically with certain exogenous parameters we study the class of noncooperative supermodular games introduced by topkis 1979 and further analyzed by vives 1985 1989 who also pointed out the importance of these games in industrial economics supermodular games are games in which each player s strategy set is partially ordered the marginal returns to increasing one s strategy rise with increases in the competitors strategies so that the game exhibits strategic complementarity 2 and if a player s strategies are multidimensional marginal returns to any one com ponent of the player s strategy rise with increases in the other components this class turns out to encompass many of the most important economic applications of noncooperative game theory in macroeconomics diamond s 1982 search model and bryant s 1983 1984 rational expectations models can be represented as supermodular games in each of these models more activity by some members of the economy raises the returns to increased levels of activity by others in oligopoly theory some models of bertrand oligopoly with differentiated products qualify as supermodu lar games in these games when a firm s competitors raise their prices the marginal profitability of the firm s own price increase rises a similar structure is present in games of new technology adoption such as those of dybvig and spatt 1983 farrell and saloner 1986 and katz and shapiro 1986 when more users hook into a communication system or more manufacturers adopt an interface standard the marginal return to others of doing the same often rises similarly in some specifications of the bank runs model introduced by diamond and dybvig 1983 when more depositors withdraw their funds from a bank it is more worthwhile for other depositors to do the same in the warrant exercise

incentives and ratcheting in a multiproduct firm a field experiment we develop a model and derive behavioral predictions for a multiproduct sales force subject to goals set based on past performance we test these predictions using a field experiment in which 53 salespersons from a chilean beverage company face exogenous variations in monthly sales goals confirming our predictions we found that 1 absent strategic considerations no goal ratcheting salespersons increase decrease sales in the product category for which the return to effort increases decreases 2 including strategic considerations behavior reverses salespersons who expect high goal ratcheting decrease increase sales in the category for which the return to effort increases decreases 3 sales did not change for the average salespersons reflecting heterogeneity in the expectations of goal ratcheting rather than unresponsiveness to incentives our study points at the importance of the dynamics of incentive design in particular the importance of understanding the dynamics of goal setting in fir

team incentives and performance evidence from a retail chain in a field experiment with a retail chain 1 300 employees 193 shops randomly selected sales teams received a bonus the bonus increases both sales and number of customers dealt with by 3 percent each dollar spent on the bonus generates 3 80 in sales and 2 10 in profit wages increase by 2 2 percent while inequality rises only moderately the analysis suggests effort complementarities to be important and the effectiveness of peer pressure in overcoming free riding to be limited after rolling out the bonus treatment and control shops performance converge suggesting long term stability of the treatment effect

the war for the fare how driver compensation affects bus system performance two systems of bus driver compensation exist in santiago chile most drivers are paid per passenger transported while a second system compensates other drivers with a fixed wage compared with fixed wage drivers per passenger drivers have incentives to engage in la guerra por el boleto the war for the fare in which drivers change their driving patterns to compete for passengers this paper takes advantage of a natural experiment provided by the coexistence of these two compensation schemes on similar routes in the same city using data on intervals between bus arrivals we find that the fixed wage contract leads to more bunching of buses and hence longer average passenger wait times the per passenger drivers are assisted by a fascinating group of independent information intermediaries called sapos who earn their living by standing at bus stops recording arrival times and selling the information to subsequent drivers who drive past this bus bunching phenomenon has frustrated passengers in cities around the world so it is exciting to see evidence that contract design can improve performance in this dimension according to our results a typical bus passenger in santiago waits roughly 10 longer for a bus on a fixed wage route relative to an incentive contract route however the improved wait times on the incentivecontract routes come at a cost the incentives lead drivers to drive noticeably more aggressively causing at least 67 more accidents per kilometer driven most people in santiago blame la guerra por el boleto for the poor service provided by buses our results have implications for the design of incentives in public transportation systems

economic incentives for managing filterable biological pollution risks from trade infectious livestock disease problems are biological pollution problems prior work on biological pollution problems generally examines the efficient allocation of prevention and control efforts but does not identify the specific externalities underpinning the design of efficiency enhancing policy instruments prior analyses also focus on problems where those being damaged do not contribute to externalities we examine a problem where the initial biological introduction harms the importer and then others are harmed by spread from this importer here the externality is the spread of infection beyond the initial importer this externality is influenced by the importer s private risk management choices which provide impure public goods that reduce disease spillovers to others making disease spread a filterable externality we derive efficient policy incentives to internalize filterable disease externalities given uncertainties about introduction and spread we find efficiency requires incentivizing an importer s trade choices along with self protection and abatement efforts in contrast to prior work that targets trade alone perhaps surprisingly we find these incentives increase with importers private risk management incentives and with their ability to directly protect others in cases where importers can spread infection to each other we find filterable externalities may lead to multiple nash equilibria