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Non-linear Incentives, Worker Productivity, and Firm Profits: Evidence from a Quasi-Experiment

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  • Freeman, Richard B.

    (Harvard University)

  • Huang, Wei

    (National University of Singapore)

  • Li, Teng

    (National University of Singapore)

Abstract

Using administrative data from a major Chinese insurance firm that raised its sales targets and rewards for insurance agents in a highly non-linear incentive system, we find that the improvement in productivity far outweighed the costs associated with bunching distortions and other gaming behaviors. Labor turnover decreased, which suggests that the extra pay for workers exceeded the non-pecuniary cost of extra effort by workers, and thus improved their well-being. The firm gained about two-thirds of the higher net output, making the reform profitable. Analysis of non-linear incentive systems should accordingly focus more on the productivity-enhancing than on the distortionary effects.

Suggested Citation

  • Freeman, Richard B. & Huang, Wei & Li, Teng, 2021. "Non-linear Incentives, Worker Productivity, and Firm Profits: Evidence from a Quasi-Experiment," IZA Discussion Papers 14125, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp14125
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    References listed on IDEAS

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    Cited by:

    1. Kuhn, Peter J. & Yu, Lizi, 2021. "Kinks as Goals: Accelerating Commissions and the Performance of Sales Teams," IZA Discussion Papers 14115, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    non-linear incentives; insurance commission; strategic gaming behavior; productivity; turnover rates;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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