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The response to incentives and contractual efficiency: Evidence from a field experiment

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  • Paarsch, Harry J.
  • Shearer, Bruce S.

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.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 5 (July)
Pages: 481-494

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Handle: RePEc:eee:eecrev:v:53:y:2009:i:5:p:481-494

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Piece rates Incentives Contractual efficiency Field experiments;

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References

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  1. Ferrall, Christopher & Shearer, Bruce, 1999. "Incentives and Transactions Costs within the Firm: Estimating an Agency Model Using Payroll Records," Review of Economic Studies, Wiley Blackwell, vol. 66(2), pages 309-38, April.
  2. Paarsch, Harry J. & Shearer, Bruce, 1996. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," Cahiers de recherche 9623, Université Laval - Département d'économique.
  3. Adam Copeland & Cyril Monnet, 2009. "The Welfare Effects of Incentive Schemes," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 93-113.
  4. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  5. Christensen, Bent Jesper & Kiefer, Nicholas M, 1994. "Measurement Error in the Prototypal Job-Search Model," Journal of Labor Economics, University of Chicago Press, vol. 12(4), pages 618-39, October.
  6. Bellemare, Charles & Shearer, Bruce, 2010. "Sorting, incentives and risk preferences: Evidence from a field experiment," Economics Letters, Elsevier, vol. 108(3), pages 345-348, September.
  7. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  8. Paarsch, Harry J. & Shearer, Bruce S., 2009. "The response to incentives and contractual efficiency: Evidence from a field experiment," European Economic Review, Elsevier, vol. 53(5), pages 481-494, July.
  9. Harry J. Paarsch & Bruce S. Shearer, 1999. "The Response of Worker Effort to Piece Rates: Evidence from the British Columbia Tree-Planting Industry," Journal of Human Resources, University of Wisconsin Press, vol. 34(4), pages 643-667.
  10. Bruce Shearer, 2004. "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment," Review of Economic Studies, Wiley Blackwell, vol. 71(2), pages 513-534, 04.
  11. Joseph E. Stiglitz, 1991. "Symposium on Organizations and Economics," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 15-24, Spring.
  12. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  13. Craig, Ben & Pencavel, John, 1992. "The Behavior of Worker Cooperatives: The Plywood Companies of the Pacific Northwest," American Economic Review, American Economic Association, vol. 82(5), pages 1083-105, December.
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Citations

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Cited by:
  1. Bernard Fortin & Nicolas Jacquemet & Bruce S. Shearer, 2010. "Labour Supply, Work Effort and Contract Choice: Theory and Evidence on Physicians," CIRANO Working Papers 2010s-40, CIRANO.
  2. Paarsch, Harry J. & Shearer, Bruce S., 2009. "The response to incentives and contractual efficiency: Evidence from a field experiment," European Economic Review, Elsevier, vol. 53(5), pages 481-494, July.
  3. Shchetinin, Oleg, 2009. "Contracting Under Reciprocal Altruism," MPRA Paper 13457, University Library of Munich, Germany.
  4. Mirco Tonin & Michael Vlassopoulos, 2012. "Social Incentives Matter: Evidence from an Online Real Effort Experiment," CEU Working Papers 2012_12, Department of Economics, Central European University, revised 20 Jul 2012.
  5. Charles Bellemare & Bruce Shearer, 2009. "On the Relevance and Composition of Gifts within the Firm: Evidence from Field Experiments," Cahiers de recherche 0932, CIRPEE.
  6. Bose, Arup & Pal, Debashis & Sappington, David E.M., 2010. "On the design of piece-rate contracts," Economics Letters, Elsevier, vol. 107(3), pages 330-332, June.
  7. Sen Wang & Tim Bogle & G. Cornelis van Kooten, 2012. "Forestry and the New Institutional Economics," Working Papers 2012-05, University of Victoria, Department of Economics, Resource Economics and Policy Analysis Research Group.

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