Incentives for Multitasking: Fixed Wages or Profit-sharing?

Abstract

Recent work in incentive theory has suggested that fixed wages provide appropriate incentives for workers performing multi-dimensional tasks. Unlike piece rates, low powered incentives do not distort the allocation of effort across tasks. However, a fixed wage is not the only alternative to an individual piece rate scheme. In this paper the effects of fixed wages and profit sharing are compared. It is shown that even in the presence of production uncertainty and even in the presence of a free-rider problem profitsharing may have advantages over both piece rates and fixed wages. Unlike piece rates, profit sharing does not distort the allocation of effort across tasks. In contrast to fixed wages, profit sharing elicits total greater effort. The empirical and theoretical implications of the model are discussed.