The response of worker effort to piece rates - Evidence from the British Columbia tree-planting industry

We measure the elasticity of worker effort with respect to changes in the piece rate using panel data collected from the payroll records of a British Columbia tree-planting firm. Our data contain information an daily worker productivity and the piece rate received over a five-month period. Using a structural model to controlfor the endogeneity of the piece rate, we estimate this elasticity to be approximately 2.14. We also calculate a nonstructural lower bound to this elasticity equal to 0.77 Structural estimation also allows us to perform policy experiments and to compare firm profits under alternative compensation systems. Our results suggest that profits would increase by at least 17 percent were the firm to implement the optimal static contract as predicted by principal-agent theory. This in crease in profits would be due to capturing worker rents after the revelation of private information over ability. Yet, only a negligible proportion of these rents could be captured while inducing workers to reveal ability truthfully, suggesting that dynamic considerations were important in determining the firm's actual choice of contract.