Working Paper: CEPR ID: DP5301
Authors: Patrick Francois
Abstract: Despite the potential for free-riding, workers motivated by `making a difference' to the mission or output of an establishment may donate labour to it. When the establishment uses performance related compensation (PRC), these labour donations closely resemble a standard private provision of public goods problem, and are not rational in large labour pools. Without PRC, however, the problem differs significantly from a standard private provision of public goods situation. Specifically, in equilibrium: there need not be free-riding, decisions are non-monotonic in valuations, and contribution incentives are significant even in large populations. When PRC is not used, the establishment tends to favour setting low wages which help to select a labor force driven by concern for the firm's output. Expected output can actually fall with the wage in this situation. For sufficiently high levels of risk aversion, performance related pay can yield less expected output than when compensation is output independent.
Keywords: incentive schemes; privately provided public goods; public sector employment; voluntarism
JEL Codes: H11; H41; H83; J45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of PRC (Y70) | increased labor donations (J89) |
| absence of PRC (Y70) | altered expectations of contribution (D64) |
| higher wages (J39) | decreased expected output (E23) |
| absence of PRC (Y70) | moral hazard affects labor donations (J22) |
| desire to make a difference (I24) | increased labor donations (J89) |