ON THE CHOICE OF INCENTIVES IN FIRMS

Simple models of individual and group incentives under uncertainty are compared, and comparative performance is shown to depend upon various exogenous parameters. The incentive effects of profit sharing will thus vary with organizational and other characteristics that may be difficult to observe, and attempts to quantify productivity effects that neglect selection bias are likely to be misspecified. Significant selection effects are found in previously used firm-level data, and productivity effects of existing profit sharing are found to be much larger than potential effects in firms without sharing arrangements. This throws doubt on policies to encourage sharing in isolation.