Incentives to Work or Incentives to Quit?
57 Pages Posted: 16 Oct 2014 Last revised: 28 Jun 2017
Date Written: June 2017
Employees often learn about their ability while working, and the resulting beliefs interact with pay incentives to shape employment outcomes. This paper investigates this issue within a model that incorporates learning about ability on the job, dynamic selection, effort, and variation in pay incentives. The empirical analysis is based on unique data from a US call center. The results show that dynamic selection and experimentation with `risky' workers are major channels through which pay incentives affect employment outcomes, profits, and compensation. Under the implemented and the profit-maximizing contracts the gains from dynamic selection and experimentation outweigh the gains from experience accumulation and effort.
Keywords: Learning, Labor Turnover, Incentives, Pay Performance
JEL Classification: J33, J63, D82, D83, M51, M52
Suggested Citation: Suggested Citation