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Incentives and Social Preferences: Experimental Evidence from a Seemingly Inefficient Traditional Labor Contract

Author

Listed:
  • Goto, Jun
  • 後藤, 潤
  • Sawada, Yasuyuki
  • Aida, Takeshi
  • Aoyagi, Keitaro
Abstract
This paper investigates the interplay between economic incentives and social norms in formulating rice planting contracts in the Philippines. In our study area, despite the potential for pervasive opportunistic behaviors by workers, a fixed-wage (FW) contract has been dominant for rice planting. To account for the use of this seemingly inefficient contractual arrangement, we adopt a hybrid experimental method of framed field experiments by randomized controlled trials (RCT), in which we randomly assign three distinct labor contracts—FW, individual piece rate (IPR), and group piece rate (GPR)—and artefactual field experiments to elicit social preference parameters. Through analyses of individual workers' performance data from framed field experiments and data on social preferences elicited by artefactual field experiments, three main empirical findings emerge. First, our basic results show the positive incentive effects in IPR and, equivalently, moral hazard problems in FW, which are consistent with standard theoretical implications. Second, non-monetary incentives seem to play a significant role under FW: while social preferences such as altruism and guilt aversion play an important role in stimulating incentives under FW, introducing monetary incentives crowds out such intrinsic motivations, and other nonmonetary factors such as positive peer effects significantly enhance incentives under a FW contract. Finally, as alternative hypotheses, our empirical results are not necessarily consistent with the hypothesis of the interlinked contract of labor and credit transactions in mitigating moral hazard problems, the optimality of FW contract under large effort measurement errors, and the intertemporal incentives arising from performance-based contract renewal probabilities. Hence, considering the interplay of intrinsic motivations and monetary incentives as well as the monetary costs of mitigating moral hazard and free-riding problems through IPR, we may conclude that seemingly perverse traditional contractual arrangements might be socially efficient.

Suggested Citation

  • Goto, Jun & 後藤, 潤 & Sawada, Yasuyuki & Aida, Takeshi & Aoyagi, Keitaro, 2015. "Incentives and Social Preferences: Experimental Evidence from a Seemingly Inefficient Traditional Labor Contract," CEI Working Paper Series 2014-12, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hitcei:2014-12
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    More about this item

    Keywords

    Randomized controlled trials; incentives; social preferences; peer effect; labor contract; field experiments;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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