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Endogenous incentive contracts and efficient coordination

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  • Cooper, David J.
  • Ioannou, Christos A.
  • Qi, Shi

Abstract

We examine the effects of endogenous assignment to incentive contracts on worker productivity. Assignment to high performance pay via a market mechanism is roughly twice as effective as imposing the same contract exogenously. This positive effect is largely offset by a negative effect for workers that endogenously choose low performance pay. We decompose the positive effect of endogenous assignment to high performance pay into effects due to selection and strategic anticipation, and find that selection has a greater effect than strategic anticipation. We use a Reverse Sort treatment to show that the effect of selection is sufficiently strong to overcome the direct effect of lower performance pay, yielding coordination at high effort levels in spite of low incentives.

Suggested Citation

  • Cooper, David J. & Ioannou, Christos A. & Qi, Shi, 2018. "Endogenous incentive contracts and efficient coordination," Games and Economic Behavior, Elsevier, vol. 112(C), pages 78-97.
    • Handle: RePEc:eee:gamebe:v:112:y:2018:i:c:p:78-97
    DOI: 10.1016/j.geb.2018.07.008
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    More about this item

    Keywords

    Experiment; Coordination; Incentive contracts; Selection;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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