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The effect of pay-for-performance contracts on wages

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  • Daniel Parent

Abstract

In this paper, I investigate the role played by learning and self-selection according to comparative advantage in the often reported result that piece rate workers (including commissions) earn more on average compared to other workers. With comparative advantage, the returns to skills are different according to whether one works under a piece rate contract or not. If that is the case, as Lazear (1986)'s model suggests, then using standard fixed effects methods will not provide consistent estimates of the true causal (or incentive) effect of explicit contracts. Using non-linear instrumental variable techniques with data from the National Longitudinal Survey of Youth and the Panel Study of Income Dynamics, I find that comparative advantage along with learning about worker skills seem to play a significant role for workers who are either at an early stage in their career or who are observed for the first time in a given job-match, when the learning process matters. In other words, for those younger/early tenure workers, the return to skills is lower in non-incentive jobs. For older workers, the return to skills is basically the same across pay methods, which is consistent with the notion that workers are eventually paid according to their fully revealed skill level, irrespective of how they are paid. Finally, by exploiting the within-job variation in pay methods, I am able to identify an incentive effect of about 11%. Cet article cherche à évaluer le rôle joué par les avantages comparés eu égard au résultat fréquemment rencontré qui veut que les travailleurs payés à la pièce ou par commission soient mieux rémunérés que les travailleurs salariés (incluant ceux qui sont payés à l'heure). Selon le modèle de Lazear (1986), la sensibilité de la rémunération à la pièce par rapport à la productivité est plus grande que dans les boulots salariés. Les avantages comparés impliquent donc que les travailleurs intrinsèquement plus productifs choisiront des contrats dans lesquels la
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  • Daniel Parent, 2009. "The effect of pay-for-performance contracts on wages," Empirical Economics, Springer, vol. 36(2), pages 269-295, May.
  • Handle: RePEc:spr:empeco:v:36:y:2009:i:2:p:269-295
    DOI: 10.1007/s00181-008-0195-0
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    Cited by:

    1. Tuomas Pekkarinen & Chris Riddell, 2008. "Performance Pay and Earnings: Evidence from Personnel Records," ILR Review, Cornell University, ILR School, vol. 61(3), pages 297-319, April.
    2. Thomas R. Berry-Stölzle & David L. Eckles, 2019. "It’s about building a book of business: incentives of insurance salespersons from future renewals," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(4), pages 702-731, October.
    3. Henneberger, Fred & Sousa-Poza, Alfonso & Ziegler, Alexandre, 2007. "Performance Pay, Sorting, and Outsourcing," IZA Discussion Papers 3019, Institute of Labor Economics (IZA).
    4. Sabrina Teyssier, 2008. "Les Modes de Rémunération comme MécanismesSélectifs de la Main d'oeuvre : Fondements Théoriques et Estimations Empiriques," Post-Print halshs-00303703, HAL.
    5. Felipe Balmaceda, 2004. "Uncertainty, Pay for Performance and Adverse Selection in a Competitive Labor Market," Documentos de Trabajo 196, Centro de Economía Aplicada, Universidad de Chile.

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