Piece-Rate Incentive Schemes

This paper uses recent results from incentive theory to study heretofore informal critiques of piece-rate compensation schemes. The informal critiques are based on the history of failed attempts to install piece-rate compensation schemes at the turn of the century. The formal analysis emphasizes the importance of information and commitment in contracting. The main result is as follows. In a work environment characterized by hidden information and a hidden action, if neither the firm nor the worker can commit to future behavior, then no compensation scheme, piece-rate or otherwise, can induce the worker not to restrict output.