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Incentives for managers and inequality among workers: evidence from a firm level experiment

Bandiera, Oriana and Barankay, Iwan and Rasul, Imran (2006) Incentives for managers and inequality among workers: evidence from a firm level experiment. 5649. Centre for Economic Policy Research, London, UK.

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Identification Number: 5649

Abstract

We present evidence from a firm level experiment in which we engineered an exogenous change in managerial compensation from fixed wages to performance pay based on the average productivity of lower-tier workers. Theory suggests that managerial incentives affect both the mean and dispersion of workers’ productivity through two channels. First, managers respond to incentives by targeting their efforts towards more able workers, implying that both the mean and the dispersion increase. Second, managers select out the least able workers, implying that the mean increases but the dispersion may decrease. In our field experiment we find that the introduction of managerial performance pay raises both the mean and dispersion of worker productivity. Analysis of individual level productivity data shows that managers target their effort towards high ability workers, and the least able workers are less likely to be selected into employment. These results highlight the interplay between the provision of managerial incentives and earnings inequality among lower-tier workers.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.cepr.org
Additional Information: © 2006 Oriana Bandiera, Iwan Barankay and Imran Rasul
Subjects: H Social Sciences > HD Industries. Land use. Labor
Sets: Collections > Economists Online
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Departments > Economics
Date Deposited: 28 Feb 2008
Last Modified: 01 Oct 2010 08:50
URI: http://eprints.lse.ac.uk/id/eprint/3553

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