On the Elasticity of Effort for Piece Rates: Evidence from the British Columbia Tree-Planting Industry
If policy prescriptions for compensation systems are to be useful, then they must be based on the empirical analysis of incentive effects; i.e., the elasticity of worker effort with respect to changes in the compensation system. We measure the elasticity of worker effort with respect to changes in the piece rate using panel data collected from the payroll records of a British Columbia tree-planting firm. Our data contain information on daily worker productivity and the piece rate received over a five-month period. We highlight the endogeneity problems inherent in traditional empirical analyses of compensation systems. In particular, employing regression methods, which use the sample covariance between piece rates and daily productivity to identify the incentive effect, we consistently estimate the elasticity of effort with respect to changes it the piece rate to be negative. Using a structural model to control for the endogeneity of the piece rate, we estimate this elasticity to be approximately 2.2. Structural estimation also allows us to perform policy experiments and to compare firm profits under alternative compensation systems. Our results suggest that profits would increase by at least 17 percent were the firm to implement the optimal contract as predicted by principal-agent theory.
|Date of creation:||1997|
|Date of revision:|
|Contact details of provider:|| Postal: Pavillon J.A. De Sève, Québec, Québec, G1K 7P4|
Phone: (418) 656-5122
Fax: (418) 656-2707
Web page: http://www.ecn.ulaval.ca
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lazear, Edward P & Rosen, Sherwin, 1981.
"Rank-Order Tournaments as Optimum Labor Contracts,"
Journal of Political Economy,
University of Chicago Press, vol. 89(5), pages 841-64, October.
- Edward P. Lazear, 2000.
"Performance Pay and Productivity,"
American Economic Review,
American Economic Association, vol. 90(5), pages 1346-1361, December.
- Oliver Hart & Bengt Holmstrom, 1986. "The Theory of Contracts," Working papers 418, Massachusetts Institute of Technology (MIT), Department of Economics.
- Christopher Ferrall & Bruce Shearer, 1999. "Incentives and Transactions Costs Within the Firm: Estimating an Agency Model Using Payroll Records," Review of Economic Studies, Oxford University Press, vol. 66(2), pages 309-338.
- Goldin, Claudia, 1986.
"Monitoring Costs and Occupational Segregation by Sex: A Historical Analysis,"
Journal of Labor Economics,
University of Chicago Press, vol. 4(1), pages 1-27, January.
- Goldin, Claudia, 1986. "Monitoring Costs and Occupational Segregation by Sex: A Historical Analysis," Scholarly Articles 2666727, Harvard University Department of Economics.
- Claudia Goldin, 1985. "Monitoring Costs and Occupational Segregation by Sex: An Historical Analysis," NBER Working Papers 1560, National Bureau of Economic Research, Inc.
- Paarsch, Harry J. & Shearer, Bruce, 1996.
"Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records,"
Cahiers de recherche
9623, Université Laval - Département d'économique.
- Paarsch, Harry J & Shearer, Bruce, 2000. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 59-92, February.
- Paarsch, H-J & Shearer, B, 1996. "Piece Rates, Fixed Wages, and Incentive Effects : Statistical Evidence From Payroll Records," Papers 9623, Laval - Recherche en Energie.
- Harry J. Paarsch & Bruce S. Shearer, 1996. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," CIRANO Working Papers 96s-31, CIRANO.
- Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
- Daniel Parent, 1997.
"Methods of Pay and Earnings: A Longitudinal Analysis,"
CIRANO Working Papers
- Daniel Parent, 1999. "Methods of Pay and Earnings: A Longitudinal Analysis," ILR Review, Cornell University, ILR School, vol. 53(1), pages 71-86, October.
- Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
When requesting a correction, please mention this item's handle: RePEc:lvl:laeccr:9713. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Manuel Paradis)
If references are entirely missing, you can add them using this form.