Bruce Shearer

Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment

Data from a field experiment conducted within a tree-planting firm are used to estimate the gain in productivity that is realized when workers are paid piece rates rather than fixed wages. The experiment provides daily observations on individual worker productivity under both piece rates and fixed wages. ANOVA methods are used to estimate the incentive effect to be 20%. Since planting conditions potentially affect the incentive effect, structural econometric methods are used to generalize the experimental results to out-of-sample conditions. The structural model suggests that the average incentive effect outside of the experimental conditions would be at least 21.7%

The Response of Worker Effort to Piece Rates: Evidence from the British Columbia Tree-Planting Industry

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. Using a structural model to control for the endogeneity of the piece rate, we estimate this elasticity to be approximately 2.14. We also calculate a nonstructural lower bound to this elasticity equal to 0.77. 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 static contract as predicted by principal-agent theory. This increase in profits would be due to capturing worker rents after the revelation of private information over ability. Yet, only a negligible proportion of these rents could be captured while inducing workers to reveal ability truthfully, suggesting that dynamic considerations were important in determining the firms actual choice of contract.

Gift giving and worker productivity: Evidence from a firm-level experiment

We present results from a field experiment, designed to measure worker response to a monetary gift from their employer. The experiment took place inside a tree-planting firm paying its workforce incentive contracts. Firm managers told a crew of tree planters they would receive a pay raise for one day as a result of a surplus not attributable to past planting productivity. We compare planter productivity--the number of trees planted per day--on the day the gift was handed out with productivity on previous and subsequent days of planting on the same block, and thus under similar planting conditions. We find direct evidence that the gift had a significant and positive effect on daily planter productivity, controlling for planter-fixed effects, weather conditions and other random daily shocks.

Incentives and Transactions Costs Within the Firm: Estimating an Agency Model Using Payroll Records

We estimate an agency model using the payroll records of a copper mine that paid a production bonus to teams of workers. We estimate the cost of incomplete information due to insurance and incentives considerations and the inefficiency caused by the simple form of the incentive contract itself. At the estimated parameters the cost of worker risk aversion (insurance) is of similar magnitude to moral hazard (incentives). Overall, incomplete information accounted for one-half of the bonus systems inefficiency relative to potential full information profits. The other half is attributed to the bonus systems inefficient generation of incentives and insurance relative to the optimal incentive contract.

Peer Pressure, Incentives, and Gender: An Experimental Analysis of Motivation in the Workplace

We present results from a real-effort experiment, simulating actual work-place conditions, comparing the productivity of workers under fixed wages and piece rates. Workers, who were paid to enter data, were exposed to different degrees of peer pressure under both payment systems. The peer pressure was generated in the form of private information about the productivity of their peers. We have two main results. First, we find no level of peer pressure for which the productivity of either male or female workers is significantly higher than productivity without peer pressure. Second, we find that very low and very high levels of peer pressure can significantly decrease productivity (particularly for men paid fixed wages). These results are consistent with models of conformism and self-motivation.

Gift exchange within a firm: evidence from a field experiment

We present results from a field experiment testing the gift-exchange hypothesis inside a tree-planting firm paying its workforce incentive contracts. Firm managers told a crew of tree planters they would receive a pay raise for one day as a result of a surplus not attribuable to past planting productivity. We compare planter productivity - the number of trees planted per day - on the day the gift was handed out with productivity on previous and subsequent days of planting on the same block, and thus under similar planting conditions. We find direct evidence that the gift had a significant and positive effect on daily planter productivity, controlling for planter-fixed effects, weather conditions and other random daily shocks. Moreover, reciprocity is the strongest when the relationship between planters and the firm is long term.

ON THE RELEVANCE AND COMPOSITION OF GIFTS WITHIN THE FIRM: EVIDENCE FROM FIELD EXPERIMENTS*

We investigate the economic relevance and the composition of gifts within a firm where output is contractible. We develop a structural econometric model that identifies workers’ optimal reaction to monetary gifts received from their employer. We estimate the model using data from two separate field experiments, both conducted within a tree-planting firm. We use the estimated structural parameters to generalize beyond the experiment, simulating how workers would react to different gifts on the part of the firm, within different labour-market settings. We find that gifts have a role to play within this firm, increasing in importance when the workers’ outside alternatives deteriorate. Profit-maximizing gifts would increase profits within slack labour markets by up to 10% on average and by up to 17% for certain types of workers. These gifts represent significant increases in worker earnings; the average gift paid to workers attains 22% of average expected earnings in the absence of gifts. We find that gifts should be given by setting piece-rates above the market-clearing level rather than through fixed wages.

Piece-Rates, Principal-Agent Models, and Productivity Profiles: Parametric and Semi-Parametric Evidence from Payroll Records

This paper uses data on the wages received by piece-rate workers to estimate worker productivity profiles. The data were collected from the payroll records of a British Columbia copper mine. The advantage of these data is the close link between observed wages and worker productivity. An explicit model is used to control for worker effort as a function of observable worker characteristics and the parameters of the compensation system. The model implies a censored wage distribution, the parameters of which can be estimated using well-known econometric techniques. Semi-parametric estimation allows for the relaxation of the distributional assumptions of the model. Results suggest that while productivity profiles were increasing concave functions of tenure, they were also very flat. I relate these results to historical arguments on the skill-saving nature of technological change in the mining industry at the end of the nineteenth century.

Labour Supply, Work Effort and Contract Choice: Theory and Evidence on Physicians

We develop and estimate a generalized labour supply model that incorporates work effort into the standard consumption-leisure trade-off. We allow workers a choice between two contracts: a piece rate contract, wherein he is paid per unit of service provided, and a mixed contract, wherein he receives an hourly wage and a reduced piece rate. This setting gives rise to a non-convex budget set and an efficient budget constraint (the upper envelope of contract-specific budget sets). We apply our model to data collected on specialist physicians working in the Province of Quebec (Canada). Our data set contains information on each physicians labour supply and their work effort (clinical services provided per hour worked). It also covers a period of policy reform under which physicians could choose between two compensation systems: the traditional fee-for-service, under which physicians receive a fee for each service provided, and mixed remuneration, under which physicians receive a per diem as well as a reduced fee-for-service. We estimate the model using a discrete choice approach. We use our estimates to simulate elasticities and the effects of ex ante reforms on physician contracts. Our results show that physician services and effort are much more sensitive to contractual changes than is their time spent at work. Our results also suggest that a mandatory reform, forcing all physicians to adopt the mixed remuneration system, would have had substantially larger effects on physician behaviour than those observed under the voluntary reform.

Compensation Policy and Worker Performance: Identifying Incentive Effects From Field Experiments

The role of field experiments in evaluating the effect of compensation policies on worker productivity is considered. Particular attention is paid to the ability of a field experiment to identify the effect of a permanent change in firm policy. While field experiments solve endogeneity problems through randomization, they do so within a specific, and at times artificial, environment that may not be replicated by a permanent policy change. As such, rather than providing a basis for the unrestricted identification of incentive effects, experiments are better thought of as providing exogenous variation with which to identify structural parameters. These parameters can, in turn, be used to predict the effects of policy changes. (JEL: J3, L2, C9) Copyright (c) 2003 The European Economic Association.