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Performance Pay and Productivity

Edward P. Lazear

Stanford Graduate School of Business; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

July 1996

NBER Working Paper 5672

What happens when a firm switches from paying hourly wages to paying piece rates? The theory developed below predicts that average productivity rises, that the firm will attract a more able work force and that the variance in output across individuals at the firm will rise as well. The theory is tested with data from a large autoglass company that changed compensation structures between 1994 and 1995. All theoretical predictions are borne out. In the firm examined, the productivity effects are extremely large, amounting to anywhere from about 20% to 36% of output, depending on what is held constant. About half of the worker-specific increase in productivity is passed on to workers in the form of higher wages.

Number of Pages in PDF File: 11

JEL Classification: L62, J33

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Date posted: September 25, 1996  

Suggested Citation

Lazear, Edward P., Performance Pay and Productivity (July 1996). NBER Working Paper 5672. Available at SSRN: http://ssrn.com/abstract=490 or http://dx.doi.org/10.2139/ssrn.490

Contact Information

Edward P. Lazear (Contact Author)
Stanford Graduate School of Business ( email )
655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9136 (Phone)
650-723-0498 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
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Citations:  221
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