Incentives in the Workplace: An Experimental Examination of How Wage Differences Across Time and Among Peers Affect Productivity and Self-Selection

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This award is funded under the American Recovery and Reinvestment Act of 2009 (Public Law 111-5). Understanding workers' responses to incentives is critical to enhancing firm productivity as well as the overall efficiency of an economy. The projects in this proposal involve conducting economic experiments to provide a better understanding of how individuals respond to life-time wage profiles as well as how they respond to wage inequality among peers. While important, workers' responses to these aspects of compensation have not yet been satisfactorily quantified because of difficulties in making inference using field data. Specifically, in field studies it is usually difficult to find circumstances in which the same individual is offered different wage profiles for otherwise equivalent jobs, or is subjected to differing levels of wage inequality. This team will conduct experiments that are designed to overcome such difficulties and identify causal relationships between different wage institutions and workplace productivity. The first set of projects involve determining how individuals respond to incentives over time, which can take the form of either (1) efficiency wages (i.e., a constant wage above the worker's outside option) or (2) deferred compensation (i.e., a sloped wage profile involving low initial wages but high wages later in life). They will examine how individuals'effort varies with the nature of their compensation scheme. They will also attempt to understand the nature of individual preferences between different compensation schemes. The results from this line of inquiry will shed light on how best to motivate employees to generate optimal work effort as well as how self-selection of employees into certain types of jobs may help explain employment patterns among different demographic groups. The second area of study will be focused on how individuals respond to the existence of structural inequality in the form of different groups receiving differing returns on effort. This line of inquiry will begin by attempting to quantify how work effort of individuals responds to the existence of inequality and will then continue by looking into how different institutional characteristics alter those effects. This issue of how individuals respond to inequality is important for workplace incentives but it also has implications for broader social issues such as class-based inequality, persistent poverty and economic underdevelopment.