Non-Linear Incentives, Worker Productivity, and Firm Profits: Evidence from a Quasi-Experiment

46 Pages Posted: 4 Feb 2019 Last revised: 12 Sep 2021

See all articles by Richard B. Freeman

Richard B. Freeman

National Bureau of Economic Research (NBER); University of Edinburgh - School of Social and Political Studies; Harvard University; London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP)

Wei Huang

Emory University - Department of Economics; National University of Singapore (NUS) - NUS Business School; IZA Institute of Labor Economics

Teng Li

Sun Yat-sen University

Date Written: January 2019

Abstract

Using administrative data from a major Chinese insurance firm that raised its sales targets and rewards for insurance agents in a highly non-linear incentive system, we examine the effects of the changes on productivity, workers gaming the system, and the division of benefits from the new system between the firm and workers. We find that while the steeper incentive system creating the bunching distortions on which theories of non-linear incentives focus and other gaming behaviors by workers, the productivity increases dwarfed those costs. The magnitude and division of the productivity benefits improved the well-being of both the firm and workers. The firm gained about two-thirds of the higher net output, making the change profitable to it. Labor turnover fell, which suggests that the greater pay for workers from their one-third of the benefits exceeded the non-pecuniary cost of extra worker effort. The key to the success of non-linear incentives appears to rest more on its inducing workers to increase output than on its distortionary effects, suggesting that greater attention be given to the first order effects of motivating workers to produce more than to its incentivizing some distortionary behavior, which it does.

Suggested Citation

Freeman, Richard B. and Huang, Wei and Li, Teng, Non-Linear Incentives, Worker Productivity, and Firm Profits: Evidence from a Quasi-Experiment (January 2019). NBER Working Paper No. w25507, Available at SSRN: https://ssrn.com/abstract=3328374

Richard B. Freeman (Contact Author)

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Teng Li

Sun Yat-sen University ( email )

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