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Incentives for Managers and Inequality Among Workers: Evidence From a Firm-Level Experiment

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Author Info
Oriana Bandiera
Iwan Barankay
Imran Rasul

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Abstract

We present evidence from a firm level experiment in which we engineered an exogenous change in managerial compensation from fixed wages to performance pay based on the average productivity of lower-tier workers. Theory suggests that managerial incentives affect both the mean and dispersion of workers' productivity through two channels. First, managers respond to incentives by targeting their efforts towards more able workers, implying that both the mean and the dispersion increase. Second, managers select out the least able workers, implying that the mean increases but the dispersion may decrease. In our field experiment we find that the introduction of managerial performance pay raises both the mean and dispersion of worker productivity. Analysis of individual level productivity data shows that managers target their effort towards high ability workers, and the least able workers are less likely to be selected into employment. These results highlight the interplay between the provision of managerial incentives and earnings inequality among lower-tier workers. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/qjec.122.2.729
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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 122 (2007)
Issue (Month): 2 (05)
Pages: 729-773
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Handle: RePEc:tpr:qjecon:v:122:y:2007:i:2:p:729-773

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  1. Charles Bellemare & Bruce Shearer, 2007. "Gift Exchange within a Firm: Evidence from a Field Experiment," Cahiers de recherche 0708, CIRPEE. [Downloadable!]
    Other versions:
  2. Christos Genakos & Mario Pagliero, 2009. "Risk Taking and Performance in Multistage Tournaments: Evidence from Weightlifting Competitions," CEP Discussion Papers dp0928, Centre for Economic Performance, LSE. [Downloadable!]
  3. Siebert, W. Stanley & Zubanov, Nikolay, 2008. "Management Economics in a Large Retail Organization," IZA Discussion Papers 3645, Institute for the Study of Labor (IZA). [Downloadable!]
  4. Sabrina Teyssier, 2008. "Experimental Evidence on Inequity Aversion and Self-Selection between Incentive Contracts," Working Papers 0821, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]
  5. Helen Simpson, 2007. "Productivity in Public Services," The Centre for Market and Public Organisation 07/164, Department of Economics, University of Bristol, UK. [Downloadable!]
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  6. Jirjahn, Uwe & Kraft, Kornelius, 2008. "Teamwork and Intra-Firm Wage Dispersion among Blue-Collar Workers," IZA Discussion Papers 3291, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Sabrina Teyssier, 2008. "Experimental Evidence on Inequity Aversion and Self-Selection between Incentive Contracts," Post-Print halshs-00303727_v1, HAL. [Downloadable!]
  8. Tsuyoshi Tsuru, 2008. "Incentives, Gaming, and the Nonlinear Pay Scheme: Evidence from Personnel Data in a Large Japanese Auto Sales Firm," Discussion Paper Series a510, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  9. W. Stanley Siebert & Nick Zubanov, 2009. "Management economics in a large UK retailer," CPB Discussion Papers 125, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  10. Antoni Cunyat & Randolph Sloof, 2008. "Employee Types and Endogenous Organizational Design," Tinbergen Institute Discussion Papers 08-019/1, Tinbergen Institute. [Downloadable!]
  11. Sabrina Teyssier, 2008. "Les Modes de Rémunération comme MécanismesSélectifs de la Main d’oeuvre : Fondements Théoriques et Estimations Empiriques," Post-Print halshs-00303703_v1, HAL. [Downloadable!]
  12. Sabrina Teyssier, 2008. "Les Modes de Rémunération comme Mécanismes Sélectifs de la Main d’oeuvre : Fondements Théoriques et Estimations Empiriques," Working Papers 0818, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]
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