Bandiera, Oriana, Barankay, Iwan and Rasul, Imran (2004) Relative and absolute incentives: evidence on worker productivity. 4431. Centre for Economic Policy Research, London, UK.Full text not available from this repository.
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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