DP4431 Relative and Absolute Incentives: Evidence on Worker Productivity

Author(s): Oriana Bandiera, Iwan Barankay, Imran Rasul
Publication Date: June 2004
Keyword(s): absolute incentives, relative incentives, social preferences
JEL(s): J33
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4431

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.