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Incentives for managers and inequality among workers: evidence from a firm-level experiment

Bandiera, O.; Barankay, I.; Rasul, I.; (2006) Incentives for managers and inequality among workers: evidence from a firm-level experiment. (ELSE Working Papers 208). ESRC Centre for Economic Learning and Social Evolution: London, UK. Green open access

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Abstract

We present evidence from a firm level experiment in which we engineered an exogenous change in managerial compensation from fixed wages to performance pay based on the average productivity of lower-tier workers. Theory suggests that managerial incentives affect both the mean and dispersion of workers’ productivity through two channels. First, managers respond to incentives by targeting their efforts towards more able workers, implying that both the mean and the dispersion increase. Second, managers select out the least able workers, implying that the mean increases but the dispersion may decrease. In our field experiment we find that the introduction of managerial performance pay raises both the mean and dispersion of worker productivity. Analysis of individual level productivity data shows that managers target their effort towards high ability workers, and the least able workers are less likely to be selected into employment. These results highlight the interplay between the provision of managerial incentives and earnings inequality among lower-tier workers.

Type: Working / discussion paper
Title: Incentives for managers and inequality among workers: evidence from a firm-level experiment
Open access status: An open access version is available from UCL Discovery
Publisher version: http://else.econ.ucl.ac.uk/newweb/papers.php#2006
Language: English
Additional information: Please see http://eprints.ucl.ac.uk/12668/ for the version published in the Quarterly Journal of Economics
UCL classification: UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of SandHS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/14521
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