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Relative and Absolute Incentives: Evidence on Worker Productivity

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  • Bandiera, Oriana
  • Barankay, Iwan
  • Rasul, Imran

Abstract

We use personnel data to compare worker productivity under a relative incentive scheme, where worker pay is negatively related to the average productivity of co-workers, with productivity under piece rates – where pay is based on individual productivity alone. We find that for the average worker, productivity is at least 50% higher under piece rates. We show this is because workers partially internalize the negative externality they impose on others under the relative incentive scheme and do so to a greater extent when they work alongside their close friends. The results illustrate the importance of understanding how workers behave in the presence of externalities when designing incentive schemes.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4431.

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Date of creation: Jun 2004
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Handle: RePEc:cpr:ceprdp:4431

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Keywords: absolute incentives; relative incentives; social preferences;

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Citations

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Cited by:
  1. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 917-962, August.
  2. Steffen Huck & Pedro Rey-Biel, 2006. "Endogenous Leadership in Teams," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(2), pages 253-261, June.
  3. Pedro Rey Biel, 2005. "Equilibrium Play and Best Response in Sequential Constant Sum Games," Experimental 0506004, EconWPA.
  4. Martin, Pardupa, 2007. "Cooperation or rivalry? Employee’s effort and appropriate knowledge distribution as key elements for maximizing the profit of the firm," MPRA Paper 26428, University Library of Munich, Germany.

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