Core Readings

Lazear, Edward P, (2000). "Performance pay and productivity," American Economic Review, 90(5): 1346-1361.

A new data set for the Safelite Glass Corporation tests the predictions that average productivity will rise, the firm will attract a more able workforce, and variance in output across individuals at the firm will rise when it shifts to piece rates. 

Newer Resources

Gruber, Jonathan., Thomas P. Hoe, and George, Stoye, (2018). “Saving Lives by Tying Hands: The Unexpected Effects of Constraining Health Care Providers," No. w24445. National Bureau of Economic Research. 

Another incentives “success story”:  Studies the effects of a landmark policy in England that imposed strong incentives to treat Emergency Department patients within four hours.  Using bunching techniques, estimation shows that the policy reduced affected patients’ wait times by 19 minutes, doctors increased the intensity of ED treatment and admitted more patients for costly inpatient care.  

Gupta, Atil.  Impacts of Performance Pay for Hospitals: The Readmissions Reduction Program. American Economic Review 2021, 111(4): 1241–1283

US policy increasingly ties payments to hospitals to indicators of service quality, such as readmissions rates. The author shows that this increase in pay-for-performance successfully reduced readmissions and reduced heart attack mortality, mostly via improvements in service quality. 

Leaver, Clare,, Owen Ozier, Pieter Serneels and Andrew Zeitlin 2021  Recruitment, Effort, and Retention Effects of Performance Contracts for Civil Servants: Experimental Evidence from Rwandan Primary Schools  American Economic Review 111(7): 2213-46.

The authors use a novel field experiment to distinguish between the selection and motivation effects of a new pay for performance (P4P) scheme:  After allowing people to self-select between P4P and fixed-wage contracts, they then re-assigned some people to the contracts they did not initially want.  This way the authors can observe peoples’ performance both under the scheme they prefer and the one they do not.  They find that changes in motivation account for 80 percent of the increase in effort associated with P4P. 

Bandiera, Oriana Greg Fischer, Andrea Prat and Erina Ytsma (2021) Do Women Respond Less to Performance Pay? Building Evidence from Multiple Experiments  American Economic Review: Insights, 3(4):435-54.

If women respond less to financial incentives than men, performance pay will widen the gender earnings gap.  Combining data from a number of existing studies, the authors find men and women respond equally to performance pay, and that performance pay increases output by 0.36 standard deviations on average.

Bandiera, Oriana, Amanda Dahlstrand and Greg Fischer. 2020 Incentives and Culture: Evidence from a Multi-Country Experiment unpublished paper, London School of Economics. 

Performance pay is common in Western countries but rarely used elsewhere.  To see whether the effects of performance pay varies across countries with different cultures, the authors set up identical data-entry firms in three countries and randomize the incentives offered to workers. They find that performance pay is much less effective in countries with less individualistic cultures, suggesting that cultural norms must be considered when designing personnel policies in organizations 

Christensen, Peter, Paul Francisco, and Erica Myers 2023 Incentive Pay and Social Returns to Worker Effort in Public Programs: Evidence from the Weatherization Assistance Program  NBER working paper no. 31322

Using a field experiment, the authors evaluate the impact of performance bonuses for government contractors on the returns to spending in a large low-income energy efficiency assistance program.  They find that performance-based bonuses dramatically increased program natural gas savings by 24%. The bonuses generate $5.39-$14.53 in social benefits for every dollar invested.  Most of these gains result from contractors who were already performing at high quality before the intervention, and there were no quality reductions in non-incentivized tasks.