Watching or not watching? Access to information and the incentive effects of firing threats

ORCID Identifiers

0000-0003-0086-8523

Document Type

Article

Source of Publication

Journal of Economic Behavior and Organization

Publication Date

9-1-2021

Abstract

A common rationale for the use of salary contracts is that they can produce substantial incentive effects when coupled with firing threats. However, enforcing firing threats may require close supervision of employees, thus possibly offsetting the very reasons salaries are commonly used, such as lowering monitoring costs and granting autonomy to employees. We design a series of experiments to study the effectiveness of firing threats when only limited information is available to supervisors. We show that light and unobtrusive supervision can produce large incentive effects. Compared to salary contracts, firing threats based on observing organizational performance alone increase employees’ output by 70% whereas only observing how long an employee works doubles output. These findings show that salaries can produce large incentive effects even in the absence of intensive supervision. Finally, we show that salary contracts with firing threats perform at least as well as other popular incentive schemes, such as bonuses, individual and team incentives, that rely on a similar amount of information about employees.

ISSN

0167-2681

Publisher

Elsevier BV

Volume

189

First Page

672

Last Page

685

Disciplines

Business

Keywords

Firing threats, Incentives, Laboratory experiments, Monitoring

Scopus ID

85111894821

Indexed in Scopus

yes

Open Access

no

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