Time Dependence and Preference: Implications for Compensation Structure and Shift Scheduling

Abstract

This study jointly examines agents’ time dependence—period effects within instantaneous utility—and time preference—behavior on discounting future utility. The study considers the start- and end-of-period effects for time dependence and exponential and hyperbolic discounting for time preference. It provides identification arguments and sufficient conditions for both time constructs. The data include agents’ work-shift schedules and daily observations in response to a firm’s non-linear compensation structure, in which the final payment depends on the history of performance. By illustrating how various time constructs jointly affect behavior, the study provides implications for designing compensation structure and employee-shift scheduling. Specifically, it disentangles the effects of time constructs to examine the effectiveness of long versus short quota-evaluation cycles, quota-bonus versus commission incentive schemes, and employee-shift scheduling. In addition, the study provides a field validation that compares post-analysis actual and counterfactual outcomes to validate the prediction accuracy of the model.

Keywords: time dependence, period effects, time preference, present bias, hyperbolic discounting, compensation, dynamic structural models, identification