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On the Elasticity of Effort for Piece Rates: Evidence from the British Columbia Tree-Planting Industry

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  • Harry J. Paarsch
  • Bruce Shearer

Abstract

If policy prescriptions for compensation systems are to be useful, then they must be based on the empirical analysis of incentive effects; i.e., the elasticity of worker effort with respect to changes in the compensation system. We measure the elasticity of worker effort with respect to changes in the piece rate using panel data collected from the payroll records of a British Columbia tree-planting firm. Our data contain information on daily worker productivity and the piece rate received over a five-month period. We highlight the endogeneity problems inherent in traditional empirical analyses of compensation systems. In particular, employing regression methods, which use the sample covariance between piece rates and daily productivity to identify the incentive effect, we consistently estimate the elasticity of effort with respect to changes it the piece rate to be negative. Using a structural model to control for the endogeneity of the piece rate, we estimate this elasticity to be approximately 2.2. Structural estimation also allows us to perform policy experiments and to compare firm profits under alternative compensation systems. Our results suggest that profits would increase by at least 17 percent were the firm to implement the optimal contract as predicted by principal-agent theory.
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Suggested Citation

  • Harry J. Paarsch & Bruce Shearer, 1997. "On the Elasticity of Effort for Piece Rates: Evidence from the British Columbia Tree-Planting Industry," CIRANO Working Papers 97s-31, CIRANO.
    • Handle: RePEc:cir:cirwor:97s-31
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    References listed on IDEAS

    as
    1. 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 841-864, October.
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    3. Paarsch, Harry J & Shearer, Bruce, 2000. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 59-92, February.
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    More about this item

    Keywords

    Compensation Systems; Incentive Effect; Principal-Agent Models; Systèmes de compensation; effet incitatif; modèles principal-agent;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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