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

47 Pages Posted: 3 Mar 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

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 find that the improvement in productivity far outweighed the costs associated with bunching distortions and other gaming behaviors. Labor turnover decreased, which suggests that the extra pay for workers exceeded the non-pecuniary cost of extra effort by workers, and thus improved their well-being. The firm gained about two-thirds of the higher net output, making the reform profitable. Analysis of non-linear incentive systems should accordingly focus more on the productivity-enhancing than on the distortionary effects.

JEL Classification: J33, M52

Suggested Citation

Freeman, Richard B. and Huang, Wei and Li, Teng, Non-Linear Incentives, Worker Productivity, and Firm Profits: Evidence from a Quasi-Experiment. IZA Discussion Paper No. 14125, Available at SSRN: https://ssrn.com/abstract=3794071

Richard B. Freeman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Wei Huang

Emory University - Department of Economics ( email )

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Teng Li

Sun Yat-sen University ( email )

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Guangzhou, Guangdong 510275
China

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