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

Author

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  • Tor Eriksson

    (Department of economics)

  • Marie Claire Villeval

    (GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - ENS LSH - Ecole Normale Supérieure-Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique)

Abstract

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.

Suggested Citation

  • Tor Eriksson & Marie Claire Villeval, 2004. "Other-Regarding Preferences and Performance Pay - An Experiment on Incentives and Sorting," Post-Print halshs-00180115, HAL.
    • Handle: RePEc:hal:journl:halshs-00180115
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00180115v1
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    References listed on IDEAS

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    1. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 437-459.
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    12. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
    13. 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.
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    Cited by:

    1. K. Pouliakas & I. Theodossiou, 2009. "Confronting Objections To Performance Pay: The Impact Of Individual And Gain‐Sharing Incentives On Job Satisfaction," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(5), pages 662-684, November.
    2. Tor Eriksson & Sabrina Teyssier & Marie Claire Villeval, 2006. "Effort Self-Selection and the Efficiency of Tournaments," Post-Print halshs-00142876, HAL.
    3. Christian Grund & Niels Westergaard-Nielsen, 2008. "The Dispersion of Employees' Wage Increases and Firm Performance," ILR Review, Cornell University, ILR School, vol. 61(4), pages 485-501, July.
    4. Tor Eriksson & Sabrina Teyssier & Marie‐Claire Villeval, 2009. "Self‐Selection And The Efficiency Of Tournaments," Economic Inquiry, Western Economic Association International, vol. 47(3), pages 530-548, July.
    5. Pouliakas, Konstantinos, 2008. "Pay enough, don’t pay too much or don’t pay at all? An empirical study of the non-monotonic impact of incentives on job satisfaction," MPRA Paper 10031, University Library of Munich, Germany.
    6. Konstantinos Pouliakas, 2010. "Pay Enough, Don't Pay Too Much or Don't Pay at All? The Impact of Bonus Intensity on Job Satisfaction," Kyklos, Wiley Blackwell, vol. 63(4), pages 597-626, November.
    7. Pouliakas, Konstantinos & Theodossiou, Ioannis, 2009. "Confronting Objections to Performance Pay: A Study of the Impact of Individual and Gain-sharing Incentives on the Job Satisfaction of British Employees," MPRA Paper 14244, University Library of Munich, Germany.
    8. Sabrina Teyssier, 2008. "Les Modes de Rémunération comme MécanismesSélectifs de la Main d'oeuvre : Fondements Théoriques et Estimations Empiriques," Post-Print halshs-00303703, HAL.
    9. Akın, Zafer, 2019. "Dishonesty, social information, and sorting," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 80(C), pages 199-210.
    10. repec:isu:genstf:201301010800004100 is not listed on IDEAS

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    Keywords

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    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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