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Relative and Absolute Incentives: Evidence on Worker Productivity

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  • Oriana Bandiera (STICERD
  • LSE

Abstract

Using personnel data, we compare worker productivity under a relative incentive scheme -where pay is based on individual productivity relative to the average productivity of the group- to productivity under piece rates. We find that productivity is at least 50% higher under piece rates. Further analysis shows this is due to workers partially internalizing the negative externality their effort imposes on others under the relative incentive scheme. Workers internalize this externality to a greater extent when they work with fewer co-workers, and a greater share of their coworkers are their close friends. The relationship among workers has no affect on productivity under piece rates

Suggested Citation

  • Oriana Bandiera (STICERD & LSE, 2004. "Relative and Absolute Incentives: Evidence on Worker Productivity," Econometric Society 2004 North American Summer Meetings 277, Econometric Society.
    • Handle: RePEc:ecm:nasm04:277
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    1. Oriana Bandiera & Iwan Barankay & Imran Rasul, 2005. "Social Preferences and the Response to Incentives: Evidence from Personnel Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 917-962.
    2. Singh, Prakarsh & Mitra, Sandip, 2017. "Incentives, information and malnutrition: Evidence from an experiment in India," European Economic Review, Elsevier, vol. 93(C), pages 24-46.
    3. Paarsch, Harry J. & Shearer, Bruce S., 2007. "Do women react differently to incentives? Evidence from experimental data and payroll records," European Economic Review, Elsevier, vol. 51(7), pages 1682-1707, October.
    4. Steffen Huck & Pedro Rey-Biel, 2006. "Endogenous Leadership in Teams," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 162(2), pages 253-261, June.
    5. Kong-Pin Chen, 2005. "External Recruitment as an Incentive Device," Journal of Labor Economics, University of Chicago Press, vol. 23(2), pages 259-278, April.
    6. Singh, Prakarsh & Mitra, Sandip, 2016. "Performance Pay and Malnutrition," IZA Discussion Papers 10084, Institute of Labor Economics (IZA).
    7. Pedro Rey Biel, 2005. "Equilibrium Play and Best Response in Sequential Constant Sum Games," Experimental 0506004, University Library of Munich, Germany.
    8. Sutter, Matthias, 2006. "Endogenous versus exogenous allocation of prizes in teams--Theory and experimental evidence," Labour Economics, Elsevier, vol. 13(5), pages 519-549, October.
    9. Jose Luiz Barros Fernandes & Juan Ignacio Pena & Benjamin Miranda Tabak, 2010. "Delegated portfolio management and risk-taking behavior," The European Journal of Finance, Taylor & Francis Journals, vol. 16(4), pages 353-372.
    10. Prakarsh Singh & Sandip Mitra, 2015. "Performance Pay and Malnutrition: Evidence from an Experiment targeting Child Malnutrition in West Bengal," NCID Working Papers 05/2015, Navarra Center for International Development, University of Navarra.
    11. Martin, Pardupa, 2007. "Cooperation or rivalry? Employee’s effort and appropriate knowledge distribution as key elements for maximizing the profit of the firm," MPRA Paper 26428, University Library of Munich, Germany.

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    More about this item

    Keywords

    absolute incentives; relative incentives; social preferences.;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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