Publication - Project Report
While the effect of performance related incentives on productivity has been widely addressed in the literature (e.g. Bandiera, Barankay, and Rasul (2005), (2007), (2009); Ashraf, Bandiera, and Jack (2014); Hearer (2004); Duflo, Hanna, and Ryan, (2012); Lazear (2000); Fryer (2011); Muralidharan and Sundararaman (2011)), the impact of an exogenous increase in wages in the presence of non-contractible effort is not completely clear. Beyond standard theories of efficiency wages, other considerations, such as reciprocity, perceived fairness and team dynamics may all influence how workers respond to a change in compensation.
Theories related to reciprocity and fairness have been developed and tested in a number of laboratory (e.g., Fehr et al. (1993), Abeler et al. (2010), Charness (2004)) and field (e.g., Gneezy and List (2006), Cohn et al. (2013)) experiments. Some of these previous studies have found empirical support for the so-called gift exchange hypothesis: “workers respond to high wage levels by increasing their effort…and to low wage levels by decreasing their effort…to the minimum required, in retaliation for the low wage” (Gneezy and List (2006)). Cohn et al. (2013) demonstrate that when wages increase only workers who perceive being underpaid increase their effort. We seek to extend this literature to a larger scale observational environment. We will take advantage of the large scale and heterogeneous (4% to 200%) increase in civil servant compensation to explore hypotheses of worker response to performance pay including gift exchange and perceived fairness.
Other studies have investigated the effect of compensation on team effort, when compensation varies within the group. Spillovers within team may be positive (e.g. Mas and Moretti 2009) or negative (e.g. Klor et al. 2013) and are likely to be influenced by the specific design of the incentive (Bandiera et al. 2005). Variation across settings in group composition offers a potential source of variation for identifying the importance of these effects in our setting.