Title: Learning about Ability and the Effects of Pay Incentives
Description: This dissertation studies how pay incentives interact with learning about ability and labor turnover to shape the employment dynamics at a US call center. The first chapter provides an introduction to my work and summarizes my main results. The second chapter offers a descriptive analysis of the work environment, the production process, and the effects of pay incentives. The third chapter introduces learning about ability and turnover in a model of effort choice under moral hazard. This model is then used to evaluate the effects of changing pay incentives at the call center. The effect of incentives on effort is significant but small. The results indicate that turnover is a major channel through which incentives affect average performance. Simulating the estimated model shows that neglecting learning and turnover makes estimates of the effect of incentives on effort twice as big as they should be. The fourth chapter investigates how considerations about the quality mix shape pay policy and profits.

Building on the estimation approach in chapter 3, the fourth chapter presents a two-step procedure that is used to estimate a fully structural version of the model introduced in the previous chapter. The results provide the basis for counterfactual policy analysis. The optimal policy, in the class of linear contracts in output, not only induces employees to exert effort but also acts as a selection mechanism that helps the firm build a workforce of high match quality over time. The results show that turnover is the major channel through which pay incentives affect profits.