We measure the elasticity of worker effort with respect to changes in the piece rate using panel data collected from the payroll records of a British Columbia tree-planting firm. Our data contain information on daily worker productivity and the piece rate received over a five-month period. Using a structural model to control for the endogeneity of the piece rate, we estimate this elasticity lo be approximately 2.14. We also calculate a nonstructural lower bound to this elasticity equal to 0.77. Structural estimation also allows us to perform policy experiments and to compare firm profits under alternative compensation systems. Our results suggest that profits would increase by at least 17 percent were the firm to implement the optimal static contract as predicted by principal-agent theory. This increase in profits would be due to capturing worker rents after the revelation of private information over ability. Yet, only a negligible proportion of these rents could be captured while inducing workers to reveal ability truthfully, suggesting that dynamic considerations were important in determining the firm's actual choice of contract.

Harry J. Paarsch is a professor of economics at the University of Iowa; Bruce Shearer is a professor of economics at the Universite Laval, Quebec, Canada and is a member of CREFA and CIRANO. The authors acknowledge research support from SSHRC, CIRANO, and FCAR (Shearer). Useful comments and helpful suggestions were provided by participants at the American Compensation Association Academic Research Conference in Islamorada, Fla., by seminar participants at the University of Iowa, Universite Laval, and Universite de Quebec a Montreal, and by Jean Fares, Christopher J. Flinn, David A. Green, Lawrence Katz, Joel L. Horowitz, John H. Pencavel, and an anonymous referee. Data used in this article can be obtained from the authors beginning June 2000 through May 2003.

© 2002 by the Board of Regents of the University of Wisconsin System

US ISSN 0022-166X

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