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Relative and Absolute Incentives: Evidence on Worker Productivity

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  • Bandiera, Oriana
  • Barankay, Iwan
  • Rasul, Imran

Abstract

We use personnel data to compare worker productivity under a relative incentive scheme, where worker pay is negatively related to the average productivity of co-workers, with productivity under piece rates ? where pay is based on individual productivity alone. We find that for the average worker, productivity is at least 50% higher under piece rates. We show this is because workers partially internalize the negative externality they impose on others under the relative incentive scheme and do so to a greater extent when they work alongside their close friends. The results illustrate the importance of understanding how workers behave in the presence of externalities when designing incentive schemes.

Suggested Citation

  • Bandiera, Oriana & Barankay, Iwan & Rasul, Imran, 2004. "Relative and Absolute Incentives: Evidence on Worker Productivity," CEPR Discussion Papers 4431, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4431
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    Cited by:

    1. Singh, Prakarsh & Mitra, Sandip, 2017. "Incentives, information and malnutrition: Evidence from an experiment in India," European Economic Review, Elsevier, vol. 93(C), pages 24-46.
    2. Steffen Huck & Pedro Rey-Biel, 2006. "Endogenous Leadership in Teams," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(2), pages 253-261, June.
    3. Kong-Pin Chen, 2005. "External Recruitment as an Incentive Device," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 259-278, April.
    4. Sandip Mitra & Prakarsh Singh, 2016. "Performance Pay and Malnutrition," Working Papers id:11259, eSocialSciences.
    5. Pedro Rey Biel, 2005. "Equilibrium Play and Best Response in Sequential Constant Sum Games," Experimental 0506004, University Library of Munich, Germany.
    6. Prakarsh Singh & Sandip Mitra, 2015. "Performance Pay and Malnutrition: Evidence from an Experiment targeting Child Malnutrition in West Bengal," NCID Working Papers 05/2015, Navarra Center for International Development, University of Navarra.
    7. Paarsch, Harry J. & Shearer, Bruce S., 2007. "Do women react differently to incentives? Evidence from experimental data and payroll records," European Economic Review, Elsevier, vol. 51(7), pages 1682-1707, October.
    8. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 917-962.
    9. Alexandra E. Hill & Timothy K. M. Beatty, 2024. "Evidence on quality spillovers from speed enhancing policies in the workplace," Economic Inquiry, Western Economic Association International, vol. 62(4), pages 1520-1538, October.
    10. Sutter, Matthias, 2006. "Endogenous versus exogenous allocation of prizes in teams--Theory and experimental evidence," Labour Economics, Elsevier, vol. 13(5), pages 519-549, October.
    11. Jose Luiz Barros Fernandes & Juan Ignacio Pena & Benjamin Miranda Tabak, 2010. "Delegated portfolio management and risk-taking behavior," The European Journal of Finance, Taylor & Francis Journals, vol. 16(4), pages 353-372.
    12. Martin, Pardupa, 2007. "Cooperation or rivalry? Employee’s effort and appropriate knowledge distribution as key elements for maximizing the profit of the firm," MPRA Paper 26428, University Library of Munich, Germany.

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    Keywords

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    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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