Technology choice,relative performance pay,and worker heterogeneity |
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Institution: | 1. Kedge Business School, Domaine de Luminy, 13288 Marseille, France;2. School of Economics, The University of Sydney, NSW 2006, Australia;1. Marshall School of Business, University of Southern California, United States;2. Koç University and Marshall School of Business, University of Southern California, United States;1. Columbia Law School, United States;2. Department of Law, University of Pavia, Italy |
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Abstract: | We identify a new problem that may arise when heterogeneous workers are motivated by relative performance pay: if workers’ abilities and the production technology are complements, the firm may prefer not to adopt a more advanced technology even though this technology would costlessly increase each worker’s productivity. Due to the complementarity between ability and technology, under technology adoption the productivity of a more able worker increases more strongly than the productivity of a less able colleague. As a consequence, both workers’ motivation to exert effort is reduced. We show that this adverse incentive effect is dominant and, consequently, keeps the firm from introducing a better production technology if talent uncertainty is sufficiently high and/or monitoring of workers is sufficiently precise. |
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