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Incentives and Gaming in a Nonlinear Compensation Scheme: Evidence from North American Auto Dealership Transaction Data

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  • Owan, Hideo
  • Tsuru, Tsuyoshi
  • Uehara, Katsuhito
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    Abstract

    This paper examines the incentive effect of a discontinuous and nonlinear compensation scheme, using the transaction data provided by two North American auto dealerships. Under the nonlinear scheme, a salesperson's expected daily commission revenue critically depends on his position in the pay schedule on the day. We find that a measure of varying incentive intensity has a positive effect on the distribution of daily sales, suggesting that salespeople adjust their effort levels in response to the intensity of the incentive. Furthermore, incentive intensity has a negative impact on the dealership's gross profit rate, suggesting that employees are gaming the system by lowering the prices they offer customers in order to achieve more sales and larger commissions. Our study shows that there is a cost associated with a discontinuous non-linear pay scheme, which is prevalent in the industry, and raises the question of why many firms use such a form of contract.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/17295/1/DP518.pdf
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    Bibliographic Info

    Paper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a518.

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    Length: 28, [9] p.
    Date of creation: Apr 2009
    Date of revision:
    Handle: RePEc:hit:hituec:a518

    Note: April 10, 2009
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    1. Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2006. "Incentives for Managers and Inequality Among Workers: Evidence from a Firm Level Experiment," IZA Discussion Papers 2062, Institute for the Study of Labor (IZA).
    2. Camerer, Colin & Babcock, Linda & Loewenstein, George & Thaler, Richard, 1996. "Labor Supply of New York City Cab Drivers: One Day At A time," Working Papers 960, California Institute of Technology, Division of the Humanities and Social Sciences.
    3. Orana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social preferences and the response to incentives: Evidence from personnel data," Natural Field Experiments 00212, The Field Experiments Website.
    4. Paul Oyer, 1998. "Fiscal Year Ends And Nonlinear Incentive Contracts: The Effect On Business Seasonality," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 149-185, February.
    5. Harry J. Paarsch & Bruce S. Shearer, 1999. "The Response of Worker Effort to Piece Rates: Evidence from the British Columbia Tree-Planting Industry," Journal of Human Resources, University of Wisconsin Press, vol. 34(4), pages 643-667.
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