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The Effects of Group Incentives in an Indian Firm - Evidence from Payroll Data

  • Bhattacherjee, Debashish


    (Department of Economics, Aarhus School of Business)

This paper estimates the effects of group incentives on productivity, pay and employment in a large unionised firm in India. Using plant-level monthly time series data from the payroll office for the period 1985-95, and controlling for both (plant) fixed effects and (contract) time effects, the paper provides econometric evidence on the effectiveness of both the level and intensity of incentive pay on the outcome measures. In addition, the relative performance of two types of group incentives defined on the basis of group size is also analysed. At the firm level, the results generally confirm predictions from theory that productivity returns to centives are non-linear and concave in shape and that the effectiveness of incentives is decreasing in group size. I argue that the latter is most likely due to the lessening of the free-rider problem and the increased effectiveness of peer/mutual monitoring associated with smaller groups. The results also point to a negative relationship between the level of incentives and employment over time.

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Paper provided by University of Aarhus, Aarhus School of Business, Department of Economics in its series Working Papers with number 03-14.

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Length: 26 pages
Date of creation: 17 Jan 2003
Date of revision:
Handle: RePEc:hhs:aareco:2003_014
Contact details of provider: Postal: The Aarhus School of Business, Prismet, Silkeborgvej 2, DK 8000 Aarhus C, Denmark
Phone: +45 89 486396
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  1. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  2. Kandel, E. & Lazear, E.P., 1990. "Peer Pressure and Partnerships," Papers 90-07, Rochester, Business - Managerial Economics Research Center.
  3. Timothy Besley & Robin Burgess, 2002. "Can Labour Regulation Hinder Economic Performance? Evidence from India," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 33, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  4. Casey Ichniowski & Kathryn Shaw, 2003. "Beyond Incentive Pay: Insiders' Estimates of the Value of Complementary Human Resource Management Practices," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 155-180, Winter.
  5. repec:tpr:qjecon:v:109:y:1994:i:4:p:921-55 is not listed on IDEAS
  6. Knez, Marc & Simester, Duncan, 2001. "Firm-Wide Incentives and Mutual Monitoring at Continental Airlines," Journal of Labor Economics, University of Chicago Press, vol. 19(4), pages 743-72, October.
  7. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, vol. 87(3), pages 314-41, June.
  8. William N. Cooke, 1994. "Employee Participation Programs, Group-Based Incentives, and Company Performance: A Union-Nonunion Comparison," ILR Review, Cornell University, ILR School, vol. 47(4), pages 594-609, July.
  9. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  10. James A. Dorn, 2003. "Introduction," Cato Journal, Cato Journal, Cato Institute, vol. 23(1), pages 1-9, Spring/Su.
  11. Bhalotra, Sonia R, 1998. "The Puzzle of Jobless Growth in Indian Manufacturing," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 60(1), pages 5-32, February.
  12. William N. Cooke, 1994. "Employee participation programs, group-based incentives, and company performance: A union-nonunion comparison," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(4), pages 594-609, July.
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