Incentives and Social Connection in the Agrarian Labor Contract: Evidence from Field Experiments in Central Luzon, Philippines

This paper presents evidence on peer effects and the role of social incentives in the traditional labor contracts. By doing so, we aim at addressing the underlying mechanisms of the peer effects and test the hypothesis of motivational crowding-out, utilizing the data from the field and laboratory experiments. We focus on the case of the Central Luzon in the Philippines where informal labor organization has supplied hired labor for rice planting since the 1960s. Team production characterizes its planting process. Interestingly, despite the possibility of infestation of opportunistic behaviors by workers, a fixed wage scheme has been adopted and remained unchanged for fifty years. We exogenously introduced three distinct labor contracts, which are fixed wage(FW), individual piece rate (IPR), and group piece rate (GPR), to 120 workers during the dry planting season in 2011. Our estimation results show the incentive effects – higher productivity level in IPR comparing to other schemes, which implies that moral hazard and free-riding behavior deteriorate performances in FW and GPR. However, we find strong evidence on peer effects that other worker's ability positively affects individual productivity level, which improves group productivity as a whole. In addition to this, our estimation results indicate the individual and peer’s social preference impinge on worker’s behavior. First, the lower intensity of monetary incentive encourages workers more to cooperate based on altruistic and reciprocal motivation, which eventually mitigate agency problems. Second, the degree of free-riding in GPR is negatively correlated with the group’s propensity to social sanction rather than monitoring or pro-social preference although its effect seems to be diminished. Finally, altruistic and reciprocal cooperation in the fixed wage are crowded out by the monetary incentives in IPR and GPR.