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Non-linear Incentives, Worker Productivity, and Firm Profits: Evidence from a Quasi-experiment

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  • Richard B. Freeman
  • Wei Huang
  • Teng Li

Abstract

Using administrative data from a major Chinese insurance firm that raised its sales targets and rewards for insurance agents in a highly non-linear incentive system, we examine the effects of the changes on productivity, workers gaming the system, and the division of benefits from the new system between the firm and workers. We find that while the steeper incentive system creating the bunching distortions on which theories of non-linear incentives focus and other gaming behaviors by workers, the productivity increases dwarfed those costs. The magnitude and division of the productivity benefits improved the well-being of both the firm and workers. The firm gained about two-thirds of the higher net output, making the change profitable to it. Labor turnover fell, which suggests that the greater pay for workers from their one-third of the benefits exceeded the non-pecuniary cost of extra worker effort. The key to the success of non-linear incentives appears to rest more on its inducing workers to increase output than on its distortionary effects, suggesting that greater attention be given to the first order effects of motivating workers to produce more than to its incentivizing some distortionary behavior, which it does.

Suggested Citation

  • Richard B. Freeman & Wei Huang & Teng Li, 2019. "Non-linear Incentives, Worker Productivity, and Firm Profits: Evidence from a Quasi-experiment," NBER Working Papers 25507, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25507
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • J00 - Labor and Demographic Economics - - General - - - General
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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