Relative and Absolute Incentives: Evidence on Worker Productivity

52 Pages Posted: 9 Jul 2004

See all articles by Oriana Bandiera

Oriana Bandiera

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Iwan Barankay

University of Pennsylvania - Management Department; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Imran Rasul

University College London - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: June 2004

Abstract

We use personnel data to compare worker productivity under a relative incentive scheme, where worker pay is negatively related to the average productivity of co-workers, with productivity under piece rates - where pay is based on individual productivity alone. We find that for the average worker, productivity is at least 50% higher under piece rates. We show this is because workers partially internalize the negative externality they impose on others under the relative incentive scheme and do so to a greater extent when they work alongside their close friends. The results illustrate the importance of understanding how workers behave in the presence of externalities when designing incentive schemes.

Keywords: Absolute incentives, relative incentives, social preferences

JEL Classification: J33

Suggested Citation

Bandiera, Oriana and Barankay, Iwan and Rasul, Imran, Relative and Absolute Incentives: Evidence on Worker Productivity (June 2004). Available at SSRN: https://ssrn.com/abstract=563303

Oriana Bandiera (Contact Author)

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7519 (Phone)
+44 20 7055 6951 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

Iwan Barankay

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

Imran Rasul

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 20 7679 5853 (Phone)
+44 20 7916 2775 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

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