Other-Regarding Preferences and Performance Pay - an Experiment on Incentives and Sorting

IZA Discussion Paper No. 1191

GATE Working Paper No. 04-08

46 Pages Posted: 14 Jul 2004

See all articles by Tor Eriksson

Tor Eriksson

Aarhus University - Department of Economics

Marie Claire Villeval

Groupe d'Analyse et de Théorie Economique (GATE), CNRS; IZA Institute of Labor Economics; Global Labor Organization (GLO)

Date Written: June 2004

Abstract

Variable pay not only creates a link between pay and performance but may also help firms in attracting the more productive employees (Lazear 1986, 2000). However, due to lack of natural data, empirical analyses of the relative importance of the selection and incentive effects of pay schemes are so far thin on the ground. In addition, these effects may be influenced by the nature of the relationship between the firm and its employees. This paper reports results of a laboratory experiment that analyzes the influence of other-regarding preferences on sorting and incentives. Experimental evidence shows that (i) the opportunity to switch to piece-rate increases the average level of output and its variance; (ii) there is a concentration of high skill workers in performance pay firms; (iii) however, in repeated interactions, efficiency wages coupled with reciprocity and inequality aversion reduce the attraction of performance related pay. Other-regarding preferences influence both the provision of incentives and their sorting effect.

Keywords: performance pay, incentives, sorting, selection, other-regarding preferences, experiment

JEL Classification: M52, J33, J31, C81, C91

Suggested Citation

Eriksson, Tor and Villeval, Marie Claire, Other-Regarding Preferences and Performance Pay - an Experiment on Incentives and Sorting (June 2004). IZA Discussion Paper No. 1191, GATE Working Paper No. 04-08, Available at SSRN: https://ssrn.com/abstract=564569

Tor Eriksson

Aarhus University - Department of Economics ( email )

Fuglesangs Allé 4
Aarhus, 8210
Denmark
45 87164978 (Phone)

Marie Claire Villeval (Contact Author)

Groupe d'Analyse et de Théorie Economique (GATE), CNRS ( email )

93, chemin des Mouilles
Ecully, 69130
France
+33 472 86 60 79 (Phone)
+33 472 86 60 90 (Fax)

HOME PAGE: http://www.gate.cnrs.fr/equipe/perso/villeval/villeval.html

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Global Labor Organization (GLO) ( email )

Collogne
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