This paper focuses on the effects of decentralized wage schemes and temporary
forms of employment on firm performance. The effect of monetary incentives on
workers\u2019 effort and firm performance is a central topic in economics. According to the
principal-agent paradigm, firms (the principal) have to link employees' remuneration
schemes to any verifiable indicator of performance in order to avoid opportunistic
behaviour. The empirical evidence shows that financial incentives have the potential to
exert strong effects on indicators of firm performance, such as productivity and worker
absenteeism, though the degree of effectiveness of such schemes varies significantly
according to the institutional/economic context in which firms operate. From both a
theoretical and empirical point of view, the prediction on the effects of temporary types
of employment on effort and productivity is less neat. In the light of these
considerations, this paper uses a sample of Italian firms to provide further empirical
evidence on whether and to what extent performance related pay schemes and contract
flexibility affect workers\u2019 effort (in terms of absenteeism) and, in turn, firm productivity.
These effects are analyzed for different types of workers (white collars vs. blue collars),
working in workplaces characterized by a different degree of uncertainty and risk and in
firms operating in different economic and institutional settings. Our results show that
wage flexibility has a significant effect on effort and then on firm's productivity and that
white collars are more responsive to monetary incentives than blue collars. Moreover,
the presence of a large share of temporary contracts, implying a lower dismissal
probability for permanent workers and a deterioration of the working environment,
appears to reduce workers' motivation and effort