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The Effects of Group Incentives in an Indian Firm: Evidence from Payroll Data

  • Debashish Bhattacherjee

This paper estimates the effects of group incentives on productivity, pay and employment in a large unionized firm in India. Using plant-level monthly time-series data from the payroll office for the period 1985-95, and controlling for both (plant) fixed effects and (contract) time effects, the paper provides econometric evidence on the effectiveness of both the level and intensity of incentive pay on the outcome measures. In addition, the relative performance of two types of group incentives defined on the basis of group size is also analysed. The results generally confirm predictions from theory that productivity returns to incentives are non-linear and concave in shape and that the effectiveness of incentives is decreasing in group size. It is argued that the latter is most likely due to the lessening of the free-rider problem and the increased effectiveness of peer monitoring associated with smaller groups. The results also point to a negative relationship between the level of incentives and employment over time. Copyright 2005 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9914.2005.00288.x
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Article provided by CEIS in its journal LABOUR.

Volume (Year): 19 (2005)
Issue (Month): 1 (03)
Pages: 147-173

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Handle: RePEc:bla:labour:v:19:y:2005:i:1:p:147-173
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  1. Nalbantian, Haig & Schotter, Andrew, 1994. "Productivity Under Group Incentives: An Experimental Study," Working Papers 94-04, C.V. Starr Center for Applied Economics, New York University.
  2. Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
  3. Timothy Besley & Robin Burgess, 2002. "Can labour regulation hinder economic performance? Evidence from India," LSE Research Online Documents on Economics 3779, London School of Economics and Political Science, LSE Library.
  4. Casey Ichniowski & Kathryn Shaw, 2003. "Beyond Incentive Pay: Insiders' Estimates of the Value of Complementary Human Resource Management Practices," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 155-180, Winter.
  5. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  6. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  7. Bhalotra, Sonia R, 1998. "The Puzzle of Jobless Growth in Indian Manufacturing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 60(1), pages 5-32, February.
  8. Knez, Marc & Simester, Duncan, 2001. "Firm-Wide Incentives and Mutual Monitoring at Continental Airlines," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 743-72, October.
  9. James A. Dorn, 2003. "Introduction," Cato Journal, Cato Journal, Cato Institute, vol. 23(1), pages 1-9, Spring/Su.
  10. William N. Cooke, 1994. "Employee Participation Programs, Group-Based Incentives, and Company Performance: A Union-Nonunion Comparison," ILR Review, Cornell University, ILR School, vol. 47(4), pages 594-609, July.
  11. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-17, August.
  12. William N. Cooke, 1994. "Employee participation programs, group-based incentives, and company performance: A union-nonunion comparison," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(4), pages 594-609, July.
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