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Incentive pay: Productivity, sorting, and adjacent rents

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  • Stefanec, Noah Patrick
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    Abstract

    I model and empirically test the hypothesis that higher-quality workers prefer performance pay to time-rate based pay because they realize rent upon two different dimensions: Explicit and implicit rents. First, higher-quality workers are outright more productive than their lower-quality counterparts, earning them explicit rent (Curme and Stefanec, 2007). Second, these same factors of production facilitate the unobserved heterogeneity for incentive workers, earning them implicit rent because they can produce a given level of output with less effort. I find strong empirical evidence to confirm that these implicit rents exist and I measure them at 1.5-3.4 percent of average real hourly earnings.

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    File URL: http://www.sciencedirect.com/science/article/B6W5H-4YDT3YD-2/2/a0987c459c2d886902b0afa87335ae3a
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

    Volume (Year): 39 (2010)
    Issue (Month): 2 (April)
    Pages: 171-179

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    Handle: RePEc:eee:soceco:v:39:y:2010:i:2:p:171-179

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    Web page: http://www.elsevier.com/locate/inca/620175

    Related research

    Keywords: Incentive pay Rent Incentive-altering preferences;

    References

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    1. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
    2. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
    3. Daniel Parent, 1999. "Methods of pay and earnings: A longitudinal analysis," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 53(1), pages 71-86, October.
    4. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
    5. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
    6. Melissa Osborne & Herbert Gintis & Samuel Bowles, 2001. "The Determinants of Earnings: A Behavioral Approach," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1137-1176, December.
    7. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 447-63, July.
    8. Samuel Bowles & Herbert Gintis, 2000. "Walrasian Economics in Retrospect," UMASS Amherst Economics Working Papers 2000-04, University of Massachusetts Amherst, Department of Economics.
    9. James J. Heckman & Jora Stixrud & Sergio Urzua, 2006. "The Effects of Cognitive and Noncognitive Abilities on Labor Market Outcomes and Social Behavior," NBER Working Papers 12006, National Bureau of Economic Research, Inc.
    10. Robert Gibbons, 1986. "Piece-Rate Incentive Schemes," Working papers 424, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. Curme, Michael & Stefanec, Noah, 2007. "Worker quality and labor market sorting," Economics Letters, Elsevier, vol. 96(2), pages 202-208, August.
    12. Oettinger, Gerald S., 2001. "Do piece rates influence effort choices? Evidence from stadium vendors," Economics Letters, Elsevier, vol. 73(1), pages 117-123, October.
    13. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    14. Carmichael, H Lorne & MacLeod, W Bentley, 2000. "Worker Cooperation and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 18(1), pages 1-19, January.
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