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

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  • Bhattacherjee, Debashish

    () (Department of Economics, Aarhus School of Business)

Abstract

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.

Suggested Citation

  • Bhattacherjee, Debashish, 2003. "The Effects of Group Incentives in an Indian Firm - Evidence from Payroll Data," Working Papers 03-14, University of Aarhus, Aarhus School of Business, Department of Economics.
  • Handle: RePEc:hhs:aareco:2003_014
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    References listed on IDEAS

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    1. James A. Dorn, 2003. "Introduction," Cato Journal, Cato Journal, Cato Institute, vol. 23(1), pages 1-9, Spring/Su.
    2. Timothy Besley & Robin Burgess, 2004. "Can Labor Regulation Hinder Economic Performance? Evidence from India," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 91-134.
    3. 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.
    4. Kandel, Eugene & Lazear, Edward P, 1992. "Peer Pressure and Partnerships," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 801-817, August.
    5. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    6. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 921-955.
    7. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    8. 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 743-772, October.
    9. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, vol. 87(3), pages 314-341, June.
    10. 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.
    11. 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.
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    Cited by:

    1. Simon Burgess & Carol Propper & Marisa Ratto & Emma Tominey, 2004. "Incentives in the Public Sector: Evidence from a Government Agency," The Centre for Market and Public Organisation 04/103, Department of Economics, University of Bristol, UK.
    2. Gill, David & Prowse, Victoria & Vlassopoulos, Michael, 2013. "Cheating in the workplace: An experimental study of the impact of bonuses and productivity," Journal of Economic Behavior & Organization, Elsevier, vol. 96(C), pages 120-134.
    3. Vera Brenčič, 2015. "Employers' Efforts to Deter Shirking in Teams: Evidence from Job Vacancies," LABOUR, CEIS, vol. 29(1), pages 52-78, March.
    4. Rai, Soumi, 2012. "Human resource management and labour relations in the Indian industrial sector," Discussion Papers, Research Group Globalization, Work, and Production SP III 2012-301, Social Science Research Center Berlin (WZB).
    5. Kshitija Dixit & Rupayan Pal, 2010. "The impact of group incentives on performance of small firms: Hausman-Taylor estimates," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(6), pages 403-414.
    6. Shaw, Kathryn, 2009. "Insider econometrics: A roadmap with stops along the way," Labour Economics, Elsevier, vol. 16(6), pages 607-617, December.
    7. Simon M. Burgess & Carol Propper & Marisa Ratto & Emma Tominey, 2017. "Incentives in the Public Sector: Evidence from a Government Agency," Post-Print hal-01651132, HAL.
    8. repec:dau:papers:123456789/12197 is not listed on IDEAS

    More about this item

    Keywords

    Group Incentives; Compensation; Free Riding; Peer Monitoring; Trade Unions; India;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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