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|
|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.