Without transparency about peer wages in a real effort experiment, a change of wages does not affect performance. With transparency, however, higher paid workers tend to work more accurately, and lower paid workers shirk more under piece rates.labor market experiments, real effort, social comparison, wage schemes

Axel Ockenfels

Ben Greiner

Peter Werner

English

Research Papers in Economics

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Department of Economics
University of Cologne 
Albertus-Magnus-Platz 
D-50923 Köln 
Germany 
 
http://www.wiso.uni-koeln.de 
 UNIVERSITY OF COLOGNE 
 
  WORKING PAPER SERIES IN ECONOMICS 
No. 48
WAGE TRANSPARENCY AND PERFORMANCE: A
REAL-EFFORT EXPERIMENT
BEN GREINER
AXEL OCKENFELS
PETER WERNERWage Transparency and Performance:
A Real-Eﬀort Experiment
Ben Greiner , Axel Ockenfelsy , and Peter Wernery;z
January 20, 2011
Abstract
Without transparency about peer wages in a real eﬀort experiment, a change
of wages does not aﬀect performance. With transparency, however, higher paid
workers tend to work more accurately, and lower paid workers shirk more under
piece rates.
Keywords: labor market experiments, real eﬀort, social comparison, wage schemes
JEL Classiﬁcation: C91, J33, M52
1. Introduction
Wage distributions within ﬁrms are often more compressed than implied by standard
economic theory (Frank, 1984a). One explanation that has been put forward is that
workers care about their relative position (Frank, 1984b; Akerlof and Yellen, 1990;
Bewley, 1999). Indeed, laboratory studies generally provide evidence for a detri-
mental eﬀect of disadvantageous relative positions (see Burchett and Willoughby,
2004; Clark et al., 2010; G¨ achter and Th¨ oni, 2010) and high wage dispersion (Rivas,
2009) on real or hypothetical eﬀort exertion. Our paper extends this literature by
investigating the role of transparency of wage dispersion after wage changes. In our
experiment, identical wages are paid for the ﬁrst part of an experimental real-eﬀort
task. In an otherwise identical second part, we then introduce wage diﬀerentials,
which are either transparent (that is, known to workers) or not. Moreover, we in-
vestigate the role of transparency under both a ﬁxed and a piece rate wage scheme.
We ﬁnd that introducing wage diﬀerentials yields performance changes only when
being transparent. In this case, high wage subjects increase their eﬀorts, while low
earners under piece rates increase work quantity at the expense of quality, and in
this sense become more prone to shirking. Contrary, under purely private wage
University of New South Wales, School of Economics, Sydney, NSW 2052, Australia.
yUniversity of Cologne, Department of Economics, D-50923 K¨ oln, Germany.
zCorresponding author. Tel: +49/221/470-4354, Fax: +49/221/470-5068.
E-Mail addresses: bgreiner AT unsw.edu.au (B. Greiner), ockenfels AT uni-koeln.de (A. Ockenfels),
peter.werner AT uni-koeln.de (P. Werner).information we do not observe performance diﬀerences between high wage and low
wage workers.
In Section 2 we present the details of our experimental design and introduce
our hypotheses. Our results are reported in Section 3 and we brieﬂy conclude in
Section 4.
2. Experimental Design and Hypotheses
The experiment consisted of two parts of a laborious working task. In each part
participants were handed out a pile of 50 hardcopy questionnaire forms.1 Each form
contained an ID number and 15 three-digit decimal numbers, ﬁlled in by participants
in a previous experiment. The task was to copy those numbers into an input mask at
the computer screen. Each of the two parts lasted 20 minutes.2 At the beginning of
each session, subjects were randomly assigned to either group A or group B. For the
ﬁrst part, all subjects were paid identical wages. In the second part, each participant
in group A received a 60% wage increase, while the wages of participants in group
B were cut by the same share. Wage changes were not related to any performance
measure, and subjects could not assess their own performance relative to others.
We implemented a 2x2 design. In all conditions, A (B) participants were in-
formed that they were assigned to a B (A) participant working on the exact same
set of questionnaires, which would allow us to easily conduct consistency checks and
search for mistakes after the experiment. Under private information, participants
were only told their own wage. In the public information information condition,
participants were also told the other participant’s wage. In the second design di-
mension, participants either received a ﬂat wage for both parts, or a piece rate wage
only depending on quantity (the number of completed forms) but not on quality
(the share of correctly transcribed forms).3
Workers in all conditions were informed that the correctness of entries would
not be checked prior to payment. So, assuming that delivering correct entries is
more costly than delivering random entries, our Hypothesis 1 [eﬀort costs] is that
quality is close to zero in all conditions.4 Also, because there is a higher incentive
to transcript forms under piece rates than under ﬂat rates, we hypothesize that
quantities are larger under piece rates (Hypothesis 2 [piece rates]), as observed by,
e.g., Lazear (2000) in a ﬁeld context.
From a standard economic point of view, our changes of wages in the second part
of the experiment should not aﬀect our Hypotheses 1 and 2. However, gift-exchange
and empirical evidence (Bellemare and Shearer, 2009) suggest that paying lower
1100 questionnaire forms were randomly distributed over both parts. All participants received
the same set of forms.
2Instructions translated from German can be found in Online Appendix A available at
http://ben.orsee.org/supplements/.
3Since from an employer perspective it might also be reasonable to make the piece rate contingent
upon single entries rather than upon complete forms, we note that the results described in Section 3
are similar if we had used single entries for our analysis.
4The probability that a single 3-digit random number is correct is 1/1000, the probability that
a complete form of 15 numbers is correct under randomness is 10
 45.
2(higher) wages may crowd out (increase) subjects’ willingness to exert eﬀort and
subsequently work quality (Hypothesis 3 [wage changes]).5 If, additionally, agents
care about relative positions, one might expect that performance depends on what
is known about the wage diﬀerences in Part 2. More speciﬁcally, we hypothesize
that the responses to wage changes as described by Hypothesis 3 are stronger under
public information (Hypothesis 4 [transparency]).
The experiment took place in early 2006 at the Cologne Laboratory for Economic
Research. Participants were invited using ORSEE (Greiner, 2004). We conducted
four sessions with altogether 126 subjects (mostly students in Business or related
ﬁelds), each session lasting approximately one hour. The computerized input mask
was implemented utilizing the z-Tree software (Fischbacher, 2007). Participants
in the piece rate treatments received 0.20 Euros per completed form in the ﬁrst
part, and 0.08 or 0.32 Euros in the second part. To ensure comparability of overall
ﬁnancial incentives, wages in the ﬁxed rate treatments were set equal to the average
payoﬀ in the piece-rate conditions. Speciﬁcally, ﬁxed wages were 6.80 Euros in the
ﬁrst part, and 2.70 or 10.90 Euros in the second part. The overall average payoﬀ was
16.10 Euros (accumulated over both parts), including a show-up fee of 2.50 Euros.
3. Experimental Results
Despite incentives to cheat, work quality is generally high: the average share of
correct forms under ﬂat wages accounts for 75.7% in Part 1 and 82.6% in Part 2;
the corresponding values under piece rates are 71.8% and 74.6%, respectively. Thus,
Hypothesis 1 can be rejected.
Regarding Hypothesis 2, we ﬁnd only weak evidence. Under ﬂat wages, partic-
ipants complete on average 29.0 forms in Part 1 and 32.6 forms in Part 2, whereas
under piece rates, subjects ﬁll in 31.2 forms in Part 1 and 36.8 forms in Part 2.6
Comparing individual working quantities between the payment schemes with two-
sided Mann-Whitney-U (MWU) tests yields p =.128 for Part 1 and p =.010 for
Part 2.
Coming to Hypothesis 3, we ﬁrst observe that average working quality and quan-
tity increase signiﬁcantly in almost all experimental groups from Part 1 to Part 2,
indicating experience eﬀects.7 In order to isolate the incentive eﬀects of the wage
diﬀerential from experience eﬀects, we compare relative performance changes of
subjects (measured in percent of Part 1 performance). Using two-sided MWU tests
we ﬁnd no signiﬁcant diﬀerences between low and high wage earners under private
information – neither under piece rates nor under ﬁxed wages (all p-values >.1).
Thus, our experiment provides no statistically signiﬁcant support for Hypothesis 3
5Some experimental studies ﬁnd that wage change eﬀects are not persistent (Gneezy and List,
2006) and that positive eﬀects of wage increases are weaker than negative responses to wage cuts
(Kube et al., 2010).
6For a complete set of descriptive statistics see Online Appendix B available at
http://ben.orsee.org/supplements/.
7Two-sided Wilcoxon Matched Pairs Signed Ranks (WMPSR) tests yield a signiﬁcant increase
in quantity in 7 out of 8 treatment groups (p <.002), and a signiﬁcant quality increase in 5 of those
groups (p <.05).
3postulating that workers respond reciprocally to wage changes (see Hennig-Schmidt
et al., 2010, who also found no gift-exchange eﬀect in the context of a real-eﬀort
experiment).
FIGURE 1: Relative Performance Change per Treatment under
Public Information in %
-15
-10
-5
0
5
10
15
20
25
 PR Low Flat Low  PR High Flat High
Quantity
-15
-10
-5
0
5
10
15
20
25
 PR Low Flat Low   PR High Flat High
Quality
Note: ”PR” and ”Flat” stand for piece rate and ﬂat wages, and ”High” and ”Low” for high and
low wages, respectively.
However, in line with Hypothesis 4, high and low wage workers adjust their
performance diﬀerently under public information. As Figure 1 shows, under piece
rates low wage subjects lack behind with respect to quality (p = :019, MWU) while
increasing quantity stronger than high wage subjects (p = :060, MWU). In the ﬁxed
wage treatment, diﬀerences between high and low wage subjects have the same signs
as in the piece rate treatment, but are not signiﬁcant at conventional levels.
A closer look at work quality reveals that participants either completed a form
diligently, with few mistakes, or did not put in much eﬀort at all, resulting in many
mistakes in the same form. We classify a form as “shirked” if the form had 6 or
more wrong ﬁelds, a threshold which is about two standard deviations (SD = 2.19)
above the average number of mistakes per form of 0.70.8 Incorrect forms with 1 to
5 mistakes were classiﬁed as “inaccurate”.
We observe that low earners under piece rates largely reduce their eﬀorts in
Part 2. First, the average share of shirked form transcriptions increases weakly
signiﬁcantly from 2.1% in Part 1 to 6.5% in Part 2 (p = :094, WMPSR). Moreover,
the average proportion of inaccurate forms increases signiﬁcantly from 22.6% to
24.1% (p = :005, WMPSR). With ﬂat wages we ﬁnd no corresponding eﬀect among
8Our results are robust against varying thresholds and alternative classiﬁcations of shirked forms.
4low earners. There is no signiﬁcant increase of shirked forms (0.2% versus 1.7%, p >
:1, WMPSR), and the share of inaccurate forms becomes (insigniﬁcantly) smaller
(25.1% and 18.8%, p = :125, WMPSR).
Highly paid subjects tend to put more eﬀort into quality. The shares of in-
accurate forms drop (weakly) signiﬁcantly from 23.6% to 15.1% under piece rates
and from 22.6% to 10.9% under ﬂat wages (p = :061 and p = :001, respectively,
WMPSR), whereas the shares of shirked form transcriptions remain roughly con-
stant (p > :1, WMPSR).9
TABLE 1: OLS Regressions of Individual Performance in
Part 2
Dependent Quality Quantity
Variable in Part 2 in Part 2
Treatment dummies
Piece Rate Public Info High 0.241*** [0.067] 7.815*** [1.795]
Piece Rate Public Info Low 0.103 [0.067] 11.323*** [1.956]
Piece Rate Private Info High 0.166** [0.064] 8.643*** [2.052]
Piece Rate Private Info Low 0.219*** [0.063] 7.594*** [1.726]
Flat Wage Public Info High 0.289*** [0.068] 4.947*** [1.754]
Flat Wage Public Info Low 0.209*** [0.067] 6.348*** [1.763]
Flat Wage Private Info High 0.221*** [0.067] 7.808*** [1.837]
Flat Wage Private Info Low 0.207*** [0.069] 7.295*** [1.788]
Quality Part 1 0.785*** [0.078]
Quantity Part 1 0.895*** [0.048]
N 126 126
R-squared 0.99 0.98
Standard errors are given in brackets. ** and *** denote signiﬁcance on the 5% and
1%-level.
Our conclusions do not change if we take into account measures for individual
ability. Table 1 lists simple linear regression models with Part 2 performance (quality
and quantity) as the dependent variable. To control for ability we include perfor-
mance in Part 1, which is, as expected, a strong and highly signiﬁcant predictor in
both speciﬁcations. Additionally we include dummies for each experimental treat-
ment condition (the constant is suppressed). Most dummy variables are positive and
signiﬁcant. Comparing the sizes of regression coeﬃcients with Wald tests conﬁrms
our previous statements. Estimated coeﬃcients for high and low wage workers do
not diﬀer under private information. Under public information and piece rates, low
wage subjects lack behind with respect to quality (p = :003) and increase quantity
stronger than highly paid subjects (p = :032). Under ﬂat wages and public informa-
tion, we observe a weakly signiﬁcant diﬀerence between high and low wage subjects
with respect to quality (p = :087).
9The shares of shirked forms in Part 1 (Part 2) are 2.1% (2.4%) for high earners under piece
rates, and 1.8% (0.8%) for high earners under ﬂat wages.
54. Conclusions
Summing up, we ﬁnd little evidence for the importance of wage changes for the
performance of our laboratory workers. However, we provide controlled laboratory
evidence that the transparency of wage dispersion strongly aﬀects performance: with
public information, increasing wages promotes eﬀort of high earners, and lowering
wages leads to more shirking. The performance eﬀects are mitigated under ﬂat
wages.
That said, we caution that our ﬁndings are based on a laboratory experiment,
employing subjects who know that they are participating in an experiment. This
limits what we can say about the external validity of our laboratory study (see
Levitt and List, 2007). Also, even though participants in our experiment exert real
eﬀorts (rather than just choosing a hypothetical eﬀort level linked to their payoﬀs),
wages and wage cuts in our experiment do not share many characteristics that seem
typical for wages and how they are negotiated in usual labor market relationships.10
On the other hand, we emphasize that our results do not only seem to have intuitive
appeal, but are also complemented by recent ﬁndings from naturally occurring ﬁeld
data: Ockenfels et al. (2010) found that while transparent bonus diﬀerences hamper
satisfaction and performance of those workers who fall behind others, intransparent
bonus diﬀerences do not.11 We believe that, taken together, this complementary
research makes a strong case that wage transparency can systematically matter,
both in the laboratory and the ﬁeld.
Acknowledgements
Financial support from the German Science Foundation (DFG) is gratefully acknowl-
edged. We thank an anonymous referee for helpful comments and suggestions.
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A Behavioral Account of the Labor Market: The Role of Fairness Concerns.

An online recruitment system for economic experiments, in:

Are workers paid their marginal products?

Bonus payments and reference point violations.

Cost beneﬁt analysis and relative position.

Do wage cuts damage work morale? Evidence from a natural ﬁeld experiment. IEW Working Papers no.

Eﬀort and comparison income: Experimental and survey evidence.

Field Experiments in Labor Economics.

Gift giving and worker productivity: Evidence from a ﬁrm-level experiment.

In search of workers real eﬀort reciprocity -a ﬁeld and a laboratory experiment.

Interdependent preferences and the competitive wage structure.

Lab Labor: What can Labor Economists Learn from the Lab? IZA Discussion Paper no. 4941. 10Other labor market experiments share similar qualiﬁcations and discussed related issues; see Fehr

Performance pay and productivity.

Putting behavioral economics to work: Testing for gift exchange in labor markets using ﬁeld experiments.

Social comparison and performance: Experimental evidence on the fair wage-eﬀort hypothesis.

The fair wage-eﬀort hypothesis and unemployment.

Wage dispersion and workers’ eﬀort.

What Do Laboratory Experiments Measuring Social Preferences Reveal About the Real World?

Why wages don’t fall during a recession.

Work productivity when knowledge of diﬀerent reward systems varies: Report from an economic experiment.

z-Tree: Zurich toolbox for ready-made economic experiments.

Wage Transparency and Performance: A Real-Effort Experiment

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