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Other-Regarding Preferences and Performance Pay – An Experiment on Incentives and Sorting

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Author Info

  • Tor Eriksson

    ()
    (Department of economics - University of Aarhus)

  • Marie-Claire Villeval

    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines, IZA - Institute for the study of labor - IZA - Institute for the Study of Labor)

Abstract

Variable pay not only creates a link between pay and performance but may also help firms in attracting the more productive employees (Lazear 1986, 2000). However, due to lack of natural data, empirical analyses of the relative importance of the selection and incentive effects of pay schemes are so far thin on the ground. In addition, these effects may be influenced by the nature of the relationship between the firm and its employees. This paper reports results of a laboratory experiment that analyzes the influence of other-regarding preferences on sorting and incentives. Experimental evidence shows that (i) the opportunity to switch to piece-rate increases the average level of output and its variance; (ii) there is a concentration of high skill workers in performance pay firms; (iii) however, in repeated interactions, efficiency wages coupled with reciprocity and inequality aversion reduce the attraction of performance related pay. Other-regarding preferences influence both the provision of incentives and their sorting effect.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00175006.

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Date of creation: Jun 2004
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Handle: RePEc:hal:journl:halshs-00175006

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Keywords: performance pay; incentives; sorting; selection; other-regarding preferences; experiment;

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References

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  1. Booth, Alison L & Frank, Jeff, 1999. "Earnings, Productivity, and Performance-Related Pay," Journal of Labor Economics, University of Chicago Press, vol. 17(3), pages 447-63, July.
  2. Fehr, Ernst & Gächter, Simon, 2001. "Do Incentive Contracts Crowd Out Voluntary Cooperation?," CEPR Discussion Papers 3017, C.E.P.R. Discussion Papers.
  3. Edward P. Lazear, 1996. "Performance Pay and Productivity," NBER Working Papers 5672, National Bureau of Economic Research, Inc.
  4. Fehr, Ernst & Kirchsteiger, Georg & Riedl, Arno, 1996. "Involuntary Unemployment and Non-compensating Wage Differentials in an Experimental Labour Market," Economic Journal, Royal Economic Society, vol. 106(434), pages 106-21, January.
  5. Fehr, Ernst & Schmidt, Klaus M., 2000. "Fairness, incentives, and contractual choices," Munich Reprints in Economics 20659, University of Munich, Department of Economics.
  6. Simon Gächter & Ernst Fehr, . "Fairness in the Labour Market – A Survey of Experimental Results," IEW - Working Papers 114, Institute for Empirical Research in Economics - University of Zurich.
  7. Fehr, Ernst & Kirchsteiger, George & Riedl, Arno, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 437-59, May.
  8. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
  9. Charness, Gary & Frechette, Guillaume R & Kagel, John H, 2002. "How Robust is Laboratory Gift Exchange?," University of California at Santa Barbara, Economics Working Paper Series qt8qq4k3ph, Department of Economics, UC Santa Barbara.
  10. Falk, Armin & Gachter, Simon & Kovacs, Judit, 1999. "Intrinsic motivation and extrinsic incentives in a repeated game with incomplete contracts," Journal of Economic Psychology, Elsevier, vol. 20(3), pages 251-284, June.
  11. Daniel Parent, 1999. "Methods of pay and earnings: A longitudinal analysis," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 53(1), pages 71-86, October.
  12. Richard B. Freeman & Morris M. Kleiner, 1998. "The Last American Shoe Manufacturers: Changing the Method of Pay to Survive Foreign Competition," NBER Working Papers 6750, National Bureau of Economic Research, Inc.
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Cited by:
  1. Tor Eriksson & Sabrina Teyssier & Marie Claire Villeval, 2009. "Self-selection and the Efficiency of Tournaments," Post-Print halshs-00451600, HAL.
  2. Grund, Christian & Westergård-Nielsen, Niels C., 2004. "The Dispersion of Employees’ Wage Increases and Firm Performance," IZA Discussion Papers 1402, Institute for the Study of Labor (IZA).
  3. Pouliakas, Konstantinos, 2008. "Pay enough, don’t pay too much or don’t pay at all? An empirical study of the non-monotonic impact of incentives on job satisfaction," MPRA Paper 10031, University Library of Munich, Germany.
  4. Tor Eriksson & Sabrina Teyssier & Marie-Claire Villeval, 2006. "Effort Self-Selection and the Efficiency of Tournaments," Post-Print halshs-00142876, HAL.
  5. Pouliakas, Konstantinos, 2010. "Pay Enough, Don't Pay Too Much or Don't Pay at All? The Impact of Bonus Intensity on Job Satisfaction," IZA Discussion Papers 4713, Institute for the Study of Labor (IZA).
  6. Pouliakas, Konstantinos & Theodossiou, Ioannis, 2009. "Confronting Objections to Performance Pay: A Study of the Impact of Individual and Gain-sharing Incentives on the Job Satisfaction of British Employees," MPRA Paper 14244, University Library of Munich, Germany.
  7. 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.

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