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Other-Regarding Preferences and Performance Pay – An Experiment on Incentives and Sorting

  • Tor Eriksson

    ()

    (Department of economics - University of Aarhus)

  • Marie-Claire Villeval

    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines, IZA - Institute for the study of labor - IZA - Institute for the Study of Labor)

Variable pay not only creates a link between pay and performance but may also help firms in attracting the more productive employees (Lazear 1986, 2000). However, due to lack of natural data, empirical analyses of the relative importance of the selection and incentive effects of pay schemes are so far thin on the ground. In addition, these effects may be influenced by the nature of the relationship between the firm and its employees. This paper reports results of a laboratory experiment that analyzes the influence of other-regarding preferences on sorting and incentives. Experimental evidence shows that (i) the opportunity to switch to piece-rate increases the average level of output and its variance; (ii) there is a concentration of high skill workers in performance pay firms; (iii) however, in repeated interactions, efficiency wages coupled with reciprocity and inequality aversion reduce the attraction of performance related pay. Other-regarding preferences influence both the provision of incentives and their sorting effect.

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Paper provided by HAL in its series Post-Print with number halshs-00175006.

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Date of creation: Jun 2004
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Handle: RePEc:hal:journl:halshs-00175006
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  1. Daniel Parent, 1997. "Methods of Pay and Earnings: A Longitudinal Analysis," CIRANO Working Papers 97s-14, CIRANO.
  2. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  3. Simon Gächter & Ernst Fehr, . "Fairness in the Labour Market – A Survey of Experimental Results," IEW - Working Papers 114, Institute for Empirical Research in Economics - University of Zurich.
  4. Gary Charness & Guillaume R. Frechette & John H. Kagel, 2004. "How Robust is Laboratory Gift Exchange?," Experimental Economics, Springer, vol. 7(2), pages 189-205, 06.
  5. Richard B. Freeman & Morris M. Kleiner, 1998. "The Last American Shoe Manufacturers: Changing the Method of Pay to Survive Foreign Competition," NBER Working Papers 6750, National Bureau of Economic Research, Inc.
  6. Fehr, Ernst & Kirchsteiger, Georg & Riedl, Arno, 1996. "Involuntary Unemployment and Non-compensating Wage Differentials in an Experimental Labour Market," Economic Journal, Royal Economic Society, vol. 106(434), pages 106-21, January.
  7. Georg Kirchsteiger & Ernst Fehr & Simon Gächter, 1997. "Reciprocity as a contract enforcement device: experimental evidence," ULB Institutional Repository 2013/5911, ULB -- Universite Libre de Bruxelles.
  8. Fehr, Ernst & Schmidt, Klaus M., 2000. "Fairness, incentives, and contractual choices," European Economic Review, Elsevier, vol. 44(4-6), pages 1057-1068, May.
  9. Georg Kirchsteiger & Ernst Fehr & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," ULB Institutional Repository 2013/5927, ULB -- Universite Libre de Bruxelles.
  10. 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.
  11. Fehr, Ernst & Schmidt, Klaus M., 2000. "Fairness, incentives, and contractual choices," Munich Reprints in Economics 20659, University of Munich, Department of Economics.
  12. Falk, Armin & Gachter, Simon & Kovacs, Judit, 1999. "Intrinsic motivation and extrinsic incentives in a repeated game with incomplete contracts," Journal of Economic Psychology, Elsevier, vol. 20(3), pages 251-284, June.
  13. Fehr, Ernst & Gächter, Simon, 2001. "Do Incentive Contracts Crowd Out Voluntary Cooperation?," CEPR Discussion Papers 3017, C.E.P.R. Discussion Papers.
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