Discussion Paper Details

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Title: Relative and Absolute Incentives: Evidence on Worker Productivity

Author(s): Oriana Bandiera, Iwan Barankay and Imran Rasul

Publication Date: June 2004

Keyword(s): absolute incentives, relative incentives and social preferences

Programme Area(s): Public Economics

Abstract: We use personnel data to compare worker productivity under a relative incentive scheme, where worker pay is negatively related to the average productivity of co-workers, with productivity under piece rates ? where pay is based on individual productivity alone. We find that for the average worker, productivity is at least 50% higher under piece rates. We show this is because workers partially internalize the negative externality they impose on others under the relative incentive scheme and do so to a greater extent when they work alongside their close friends. The results illustrate the importance of understanding how workers behave in the presence of externalities when designing incentive schemes.

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Bibliographic Reference

Bandiera, O, Barankay, I and Rasul, I. 2004. 'Relative and Absolute Incentives: Evidence on Worker Productivity'. London, Centre for Economic Policy Research.