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Deferred compensation vs. efficiency wages: An experimental test of effort provision and self-selection

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  • Macpherson, David A.
  • Prasad, Kislaya
  • Salmon, Timothy C.

Abstract

We compare the ability of two common compensation structures, efficiency wages (EW) and deferred compensation (DC), at inducing effort from workers. We test predictions on effort provision and elicit preferences between the two wage structures. The theoretical predictions on effort are generally well supported, although we find over-provision of effort with EW. In consequence, although the theoretical prediction that DC is more cost-effective is supported, the difference is small. We also find a marked preference for EW that cannot be explained by risk aversion. The two effects combine to largely dissipate any advantage that DC may have in inducing effort.

Suggested Citation

  • Macpherson, David A. & Prasad, Kislaya & Salmon, Timothy C., 2014. "Deferred compensation vs. efficiency wages: An experimental test of effort provision and self-selection," Journal of Economic Behavior & Organization, Elsevier, vol. 102(C), pages 90-107.
  • Handle: RePEc:eee:jeborg:v:102:y:2014:i:c:p:90-107
    DOI: 10.1016/j.jebo.2014.03.006
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    2. Cooper, David J. & Saral, Krista Jabs, 2013. "Entrepreneurship and team participation: An experimental study," European Economic Review, Elsevier, vol. 59(C), pages 126-140.
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    5. John S. Heywood & Uwe Jirjahn, 2015. "The German Labor Market for Older Workers in Comparative Perspective," Research Papers in Economics 2015-02, University of Trier, Department of Economics.
    6. John S. Heywood & Uwe Jirjahn, 2016. "The hiring and employment of older workers in Germany: a comparative perspective [Die Beschäftigung und Neueinstellung älterer Arbeitnehmer in Deutschland: Eine vergleichende Perspektive]," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 49(4), pages 349-366, December.
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    More about this item

    Keywords

    Incentive contracts; Principal-agent model; Self-selection; Experiments;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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