Productivity Response to a Contract Change

54 Pages Posted: 3 Apr 2014

See all articles by Rajshri Jayaraman

Rajshri Jayaraman

ESMT European School of Management and Technology

Debraj Ray

New York University (NYU) - Department of Economics; Autonomous University of Barcelona - Instituto de Analisis Economico (CSIC)

Francis de Vericourt

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: March 10, 2014

Abstract

This paper studies the productivity impact of a contract change for tea pluckers in an Indian plantation. The contract, implemented at the end of a three-year cycle in which contracts are generally revised, was (a) the joint outcome of negotiations between twenty unions and plantations, (b) mandated to respect a state government notification stipulating a new minimum wage for plantation workers statewide, and (c) applicable equally to all the plantations in the local region. The contract raised the baseline wage by 30% but lowered marginal incentives, by shifting the existing piece rates to higher minimum thresholds and eliminating an existing penalty per unit for low output. In the one month following the contract change, output increased by a factor between 30-60%, the exact number depending on the choice of counterfactual and the set of controls applied. This large and contrarian response to a flattening of marginal incentives is at odds with the standard model, including one that incorporates dynamic incentives, and it can only be partly accounted for by higher supervisory effort. We conclude that the increase is a “behavioral” response. Yet in subsequent months, the increase is comprehensively reversed. In fact, an entirely standard model with no behavioral or dynamic features that we estimate off the pre-change data, fits the observations four months after the contract change remarkably well. While not an unequivocal indictment of the recent emphasis on “behavioral economics,” the findings suggest that non-standard responses may be ephemeral, especially in employment contexts in which the baseline relationship is delineated by financial considerations in the first place. From an empirical perspective, therefore, it is ideal to examine responses to a contract change over an substantial period of time.

Keywords: incentive pay, personnel economics, productivity, contracts

JEL Classification: J430

Suggested Citation

Jayaraman, Rajshri and Ray, Debraj and de Vericourt, Francis, Productivity Response to a Contract Change (March 10, 2014). CESifo Working Paper Series No. 4679, Available at SSRN: https://ssrn.com/abstract=2419857

Rajshri Jayaraman (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin, Berlin 10178
Germany

Debraj Ray

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10003
United States
212-998-8906 (Phone)
212-995-4186 (Fax)

Autonomous University of Barcelona - Instituto de Analisis Economico (CSIC)

Campus UAB
E-08193 Bellaterra
Spain

Francis De Vericourt

Independent

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