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Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records

  • Paarsch, Harry J.
  • Shearer, Bruce

    ()

We estimate the gain in productivity that is realized by paying workers piece rates rather than fixed wages; i.e., theincentive effect. Our data come from the payroll records of a British Columbia tree-planting firm that paid its workers both piece rates and fixed wages. These data contain information on the daily productivity of workers over a period of nearly six months. Furthermore, we observe the same workers under both piece rates and fixed wages, allowing us to control for individual-specific effects in the data. We develop and estimate an agency model or worker behaviour under piece rates and fixed wages. The model implies optimal decision rules for the firm's choice of a compensation system as a function of planting conditions. We use the model to derive statistical implications for the incentive effect. We demonstrate that while simple regression methods cannot identify the incentive effect (due to the endogeneity of the payment system), they can provide upper and lower bounds to this effect. We estimate those bounds to be 5% and 32% of observed productivity on piece rate contracts. We also demonstrate that the model cand be estimated structurally, wherein the firm's optimal choice of a compensation system is built directly into the estimation procedure. Structural results suggest that incentives accounted for 9.1% of observed productivity. Nous mesurons le gain de productivité réalisé quand les travailleurs sont payés à la pièce plutôt qu'à taux fixe, i.e. l'effet incitatif. Nos données proviennent des archives d'une compagnie qui s'occupe de la plantation d'arbres en Colombie-Britannique. Cette compagnie a payé ses travailleurs à la pièce et à taux fixe. Nos données contiennent des informations sur la productivité et sur les salaires quotidiens des travailleurs sur une période de presque six mois. De plus, nous observons les mêmes travailleurs sous les deux systèmes de paye, ce qui nous permet de contrôler les effets spécifiques aux individus dans les don

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Paper provided by Université Laval - Département d'économique in its series Cahiers de recherche with number 9623.

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Date of creation: 1996
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Handle: RePEc:lvl:laeccr:9623
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  1. Charles Brown, 1990. "Firms' choice of method of pay," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 43(3), pages 165-182, February.
  2. Christopher Ferrall & Bruce Shearer, 1994. "Incentives, Team Production, Transaction Costs, and the Optimal Contract: Estimates of an Agency Model using Payroll Records," Working Papers 908, Queen's University, Department of Economics.
  3. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  4. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  5. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  6. Lazear, Edward P, 1986. "Salaries and Piece Rates," The Journal of Business, University of Chicago Press, vol. 59(3), pages 405-31, July.
  7. Jones, Derek C & Kato, Takao, 1995. "The Productivity Effects of Employee Stock-Ownership Plans and Bonuses: Evidence from Japanese Panel Data," American Economic Review, American Economic Association, vol. 85(3), pages 391-414, June.
  8. Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
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