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Incentive pay: Productivity, sorting, and adjacent rents

  • Stefanec, Noah Patrick
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    I model and empirically test the hypothesis that higher-quality workers prefer performance pay to time-rate based pay because they realize rent upon two different dimensions: Explicit and implicit rents. First, higher-quality workers are outright more productive than their lower-quality counterparts, earning them explicit rent (Curme and Stefanec, 2007). Second, these same factors of production facilitate the unobserved heterogeneity for incentive workers, earning them implicit rent because they can produce a given level of output with less effort. I find strong empirical evidence to confirm that these implicit rents exist and I measure them at 1.5-3.4 percent of average real hourly earnings.

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    Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

    Volume (Year): 39 (2010)
    Issue (Month): 2 (April)
    Pages: 171-179

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    Handle: RePEc:eee:soceco:v:39:y:2010:i:2:p:171-179
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620175

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    1. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    2. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    3. Cornelissen, Thomas & Heywood, John S. & Jirjahn, Uwe, 2011. "Performance pay, risk attitudes and job satisfaction," Labour Economics, Elsevier, vol. 18(2), pages 229-239, April.
    4. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
    5. Carmichael, H Lorne & MacLeod, W Bentley, 2000. "Worker Cooperation and the Ratchet Effect," Journal of Labor Economics, University of Chicago Press, vol. 18(1), pages 1-19, January.
    6. Oettinger, Gerald S., 2001. "Do piece rates influence effort choices? Evidence from stadium vendors," Economics Letters, Elsevier, vol. 73(1), pages 117-123, October.
    7. 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.
    8. Daniel Parent, 1997. "Methods of Pay and Earnings: A Longitudinal Analysis," CIRANO Working Papers 97s-14, CIRANO.
    9. Melissa Osborne & Herbert Gintis & Samuel Bowles, 2001. "The Determinants of Earnings: A Behavioral Approach," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1137-1176, December.
    10. Robert Gibbons, 1986. "Piece-Rate Incentive Schemes," Working papers 424, Massachusetts Institute of Technology (MIT), Department of Economics.
    11. J. A. Hausman, 1976. "Specification Tests in Econometrics," Working papers 185, Massachusetts Institute of Technology (MIT), Department of Economics.
    12. Curme, Michael & Stefanec, Noah, 2007. "Worker quality and labor market sorting," Economics Letters, Elsevier, vol. 96(2), pages 202-208, August.
    13. James J. Heckman & Jora Stixrud & Sergio Urzua, 2006. "The Effects of Cognitive and Noncognitive Abilities on Labor Market Outcomes and Social Behavior," NBER Working Papers 12006, National Bureau of Economic Research, Inc.
    14. Samuel Bowles & Herbert Gintis, 2000. "Walrasian Economics In Retrospect," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1411-1439, November.
    15. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
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