Measuring workers’ financial incentives

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See all articles by Daniel Bias

Daniel Bias

Swedish House of Finance

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Benjamin Lochner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Thomas Schmid

The University of Hong Kong - Faculty of Business and Economics

Date Written: August 13, 2020

Abstract

We propose a novel measure for workers’ financial incentives based on within-establishment wage differences among similar workers from the same occupation. This measure captures all forms of incentive pay that lead to worker-employer-specific pay premiums, including explicit (e.g., bonuses) and implicit forms (e.g., tournaments). We estimate the measure using a linked worker-establishment-firm dataset that covers 31 million workers in Germany. For validation, we exploit survey-based information on performance pay and variation in monitoring costs due to occupational characteristics, establishment size, and task complexity and show that the measure behaves as theoretically predicted. Applying the measure yields evidence that workers’ incentives positively correlate with firms’ performance and innovativeness, which supports a positive relationship between incentives and effort.

Keywords: Worker incentives, wage inequality, worker characteristics, firm performance, firm innovativeness

JEL Classification: G32, J31, M52

Suggested Citation

Bias, Daniel and Lin, Chen and Lochner, Benjamin and Schmid, Thomas, Measuring workers’ financial incentives (August 13, 2020). Available at SSRN: https://ssrn.com/abstract=

Daniel Bias

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Benjamin Lochner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Schloßplatz 4
Erlangen, DE Bavaria 91054
Germany

Thomas Schmid (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

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