The response to incentives and contractual efficiency: Evidence from a field experiment

Harry J. Paarsch and Bruce S. Shearer

European Economic Review, 2009, vol. 53, issue 5, pages 481-494

Abstract: We use data from a field experiment to estimate worker reaction to incentives and the optimality of piece-rate contracts. Our estimate of the elasticity of output with respect to piece rates is 0.39. Regression methods cannot predict performance under hypothetical contracts. Therefore, we apply structural econometric methods (without imposing profit maximization) to evaluate observed-contract optimality. Using profit as a metric, we estimate the distance between observed and profit-maximizing contracts to be negligible. This suggests that observed contracts closely approximate optimal contracts under asymmetric information about worker ability. Under complete information, the firm could increase expected profits by 14 percent keeping workers indifferent to the observed piece-rate contract. Profits could increase between 44 and 49 percent if the firm exploited information about ability to reduce worker utility to the outside alternative.

Keywords: Piece; rates; Incentives; Contractual; efficiency; Field; experiments (search for similar items in EconPapers)
Date: 2009

Downloads: (external link)
http://www.sciencedirect.com/science/article/B6V64 ... f335cc56f3d001e026ef
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eee:eecrev:v:53:y:2009:i:5:p:481-494

Access Statistics for this article

European Economic Review is edited by G. A. Pfann, Z. Eckstein, E. Gal-Or, T. Gylfason and J. Von Hagen

More articles in European Economic Review from Elsevier
Series data maintained by Heidi Boesdal ().