Mobility and productivity in a dual labor market: an experiment

We propose an experiment where participants receive one of two contracts involving a piece-rate payment for performing a real-effort task. The differences in piece-rate levels aim to capture earnings differentials between formal and informal markets to study how the reallocation rules of these contracts, capturing labor mobility, affect the workers’ effort supply. We use a tournament structure where the worst-performer of the best contract and the top-performer of the worst contract enter into a contest, whose outcome is defined by the completed transcriptions in a real-effort task. We find that these contests, regardless of a low or high mobility rule based on effort, increase the participants' productivity. We also find that low mobility rules have a larger effect on a sample of workers when combined with a meritocratic initial allocation of the contracts. By contrast, students react more to rules evoking high labor mobility. We also find that the most significant increase in productivity comes from participants who retain the best contract after the contest, suggesting that perceptions of downward mobility are dominant in altering effort supply.