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

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  • Harry J. Paarsch

    ()

  • Bruce S. Shearer

    ()

Abstract

We estimate the gain in productivity that is realized by paying workers piece rates rather than fixed wages; i.e., theincentive effect. Our data come from the payroll records of a British Columbia tree-planting firm that paid its workers both piece rates and fixed wages. These data contain information on the daily productivity of workers over a period of nearly six months. Furthermore, we observe the same workers under both piece rates and fixed wages, allowing us to control for individual-specific effects in the data. We develop and estimate an agency model or worker behaviour 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 planting conditions. We use the model to derive statistical implications for the incentive effect. We demonstrate that while simple regression methods cannot identify the incentive effect (due to the endogeneity of the payment system), they can provide upper and lower bounds to this effect. We estimate those bounds to be 5% and 32% of observed productivity on piece rate contracts. We also demonstrate that the model cand be estimated structurally, wherein the firm's optimal choice of a compensation system is built directly into the estimation procedure. Structural results suggest that incentives accounted for 9.1% of observed productivity. Nous mesurons le gain de productivité réalisé quand les travailleurs sont payés à la pièce plutôt qu'à taux fixe, i.e. l'effet incitatif. Nos données proviennent des archives d'une compagnie qui s'occupe de la plantation d'arbres en Colombie-Britannique. Cette compagnie a payé ses travailleurs à la pièce et à taux fixe. Nos données contiennent des informations sur la productivité et sur les salaires quotidiens des travailleurs sur une période de presque six mois. De plus, nous observons les mêmes travailleurs sous les deux systèmes de paye, ce qui nous permet de contrôler les effets spécifiques aux individus dans les données. Nous développons et estimons un modèle simple du genre principal-agent pour analyser le comportement des travailleurs sous les deux systèmes de paye. Le modèle implique un choix optimal de la part de la firme du système de paye en fonction des conditions de plantation. Nous utilisons le modèle pour déterminer les implications statistiques de la mesure de l'effet incitatif. Nous montrons, que bien que les méthodes de régression simple ne sont pas capables d'identifier l'effet incitatif (à cause de l'endogénéité du système de paye), elles peuvent être utilisées pour calculer les bornes inférieures et supérieures de l'effet incitatif. Nous évaluons ces bornes à 5% et 32% de la productivité observée quand les travailleurs sont payés à la pièce. De plus, nous montrons que le modèle peut être estimé de façon structurelle en incluant directement dans l'estimation la décision optimale de la part de la firme au niveau de son choix du système de paye. Nos résultats structurels suggèrent que l'effet incitatif compte pour 9,1% de la productivité observée quand les travailleurs sont payés à la pièce.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 96s-31.

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Date of creation: 01 Nov 1996
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Handle: RePEc:cir:cirwor:96s-31

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Keywords: Compensation Systems; Incentive Effect; Principal-Agent Models; Systèmes de compensation; effet incitatif; modèles principal-agent;

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References

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  1. 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.
  2. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
  3. Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
  5. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  6. 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.
  7. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  8. Charles Brown, 1990. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc.
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