AbstractThe paper extends the theoretical approach in Lazear (1986, 1996) to show that jobs with performance related pay (PRP) attract workers of higher unobservable ability, and also induce workers to provide greater effort. We then test some of the predictions of this model against data from the British Household Panel Survey, using earnings as a proxy for productivity. We find that PRP raises wages by about 9% for men and 6% for women over the entire (union and non-union) sample. Our theoretical calculations show that the estimated earnings differentials represent average productivity differentials net of monitoring costs, but not of the disutility of additional effort expended by workers. But the productivity differential is not a true productivity gain, for it includes a non-productive sorting effect as well as the effort effect. For all these reasons, the estimated return to PRP of 9% for men and 6% for women represents upper bounds on the productivity gains.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1593.
Date of creation: Mar 1997
Date of revision:
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Other versions of this item:
- Booth, Alison L. & Frank, Jeff, 1996. "Performance related pay," ISER Working Paper Series 96-14, Institute for Social and Economic Research.
- Booth, A-L & Frank, J, 1997. "Performance Related Pay," CEPR Discussion Papers 364, Centre for Economic Policy Research, Research School of Economics, Australian National University.
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
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- NAKABAYASHI, Masaki, 2009. "Poaching, Courts, and Settlements:Complementarity of Governance in Labor Markets," ISS Discussion Paper Series (series F) f145, Institute of Social Science, The University of Tokyo, revised 21 Jan 2014.
- Cowling, Marc, 2007. "Performance Related Pay Coverage in the UK," MPRA Paper 1619, University Library of Munich, Germany.
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- Hasnain, Zahid & Manning, Nick & Pierskalla Henryk, 2012. "Performance-related pay in the public sector : a review of theory and evidence," Policy Research Working Paper Series 6043, The World Bank.
- Lucifora, Claudio & Origo, Federica, 2012. "Performance Related Pay and Firm Productivity: New Evidence from a Quasi-Natural Experiment in Italy," IZA Discussion Papers 6483, Institute for the Study of Labor (IZA).
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