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The Sociology of Groups and the Economics of Incentives: Theory and Evidence on Compensation Systems

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  • William E. Encinosa III
  • Martin Gaynor
  • James B. Rebitzer

Abstract

This paper incorporates the sociological concept of group norms' into an economic analysis of pay systems. We use a behavioral microeconomic model and a unique survey of medical groups to examine the theoretical and empirical relationship between group norms and incentive pay. Our findings suggest that, at least for medical groups, norms are binding constraints in the choice of pay practices. While group norms matter, the patterns in the data suggest that they are not all that matters. Analysis of the preferences and activities of individual physicians indicate that factors highlighted by the economic theory of agency, notably income insurance and multi-task considerations, also shape pay policies. The conclusion we draw from these results is that the sociological concept of group norms augments rather than replaces more conventional economic analyses of pay practices.

Suggested Citation

  • William E. Encinosa III & Martin Gaynor & James B. Rebitzer, 1997. "The Sociology of Groups and the Economics of Incentives: Theory and Evidence on Compensation Systems," NBER Working Papers 5953, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5953
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    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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