The Response to Incentives and Contractual Efficiency: Evidence from a Field Experiment

Harry Paarsch and Bruce S. Shearer

Cahiers de recherche from CIRPEE

Abstract: We investigate the efficiency of piece-rate contracts using data from a field experiment, conducted within a tree-planting firm. During the experiment, the piece rate paid to planters was exogenously increased. Regression methods yield an estimate of the elasticity of output with respect to changes in the piece rate of 0.39. Regression methods are limited in their ability to predict the performance of alternative contracts. Therefore, we apply structural methods to interpret the experimental data. Our structural estimate of the elasticity is 0.37, very close to the regression estimate. Importantly, our structural model is identified without imposing profit maximization. This allows us to evaluate the optimality of the observed contract. We simply measure the profit distance between the observed contract and the profit-maximizing contract, evaluated at the structural parameter estimates. We estimate this distance to be negligible, suggesting that the observed contract closely approximates the expected-profit maximizing contract under asymmetric information. Under complete information, expected profits would increased by approximately fourteen percent, holding expected utility constant.

Keywords: Incentives; Contractual Efficiency; Field Experiments (search for similar items in EconPapers)
JEL-codes: C93 J33 J41 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-exp
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: The response to incentives and contractual efficiency: Evidence from a field experiment (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0701

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