Social Preferences, Background Homogeneity, and Incentive Contracts

We examine how the effects of incentive contracts on effort provision and learning outcomes vary with two important employee characteristics using a proprietary dataset from a Chinese manufacturing plant. We obtain data on how employees entered the firm (using the recruitment channel of referral by current workers or not) and on the background of the employees (i.e., their hometown). We argue that referred workers are likely to have stronger social preferences and that workers from the same hometown will have lower communication and coordination costs when working together. Based on these arguments, we investigate how the proportion of referred workers and the degree of hometown homogeneity influence effort provision and learning. We exploit differences in the production layout of the manufacturing plant to examine how the effect of both employee characteristics on incentive contract outcomes varies across production environments with (1) team-based production and (2) individual work stations in a manufacturing line. Our results show that employee characteristics are a significant factor in determining incentive contract outcomes. The effect of these characteristics, however, depends on the specific production environment.

This seminar is organised by the Erasmus Accounting Research Group.