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Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records

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  • Paarsch, Harry J
  • Shearer, Bruce

Abstract

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. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 41 (2000)
Issue (Month): 1 (February)
Pages: 59-92

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Handle: RePEc:ier:iecrev:v:41:y:2000:i:1:p:59-92

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  1. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  2. Christopher Ferrall & Bruce Shearer, 1994. "Incentives, Team Production, Transaction Costs, and the Optimal Contract: Estimates of an Agency Model using Payroll Records," Working Papers 908, Queen's University, Department of Economics.
  3. Charles Brown, 1990. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc.
  4. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  5. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
  6. Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Jones, Derek C & Kato, Takao, 1995. "The Productivity Effects of Employee Stock-Ownership Plans and Bonuses: Evidence from Japanese Panel Data," American Economic Review, American Economic Association, vol. 85(3), pages 391-414, June.
  8. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
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