Economic Initiatives Can Lead to Unexpected Behaviours... at First - Ideas for Leaders
Idea #568

Economic Initiatives Can Lead to Unexpected Behaviours… at First

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Employee behaviour sometimes contradicts standard economic models. A study of a contract change in India, for example, led to greater output when the models called for less output. As the study reveals, however, the conflicting behaviour was only temporary; over time, employee behaviour in this case complied with the models. The study offers a warning to use longer-term data to measure the impact of economic initiatives or a policy change. 


Shifting the bulk of compensation from mostly incentives (how much employees earn depends on how much they work) to mostly wages (employees earn the same guaranteed amount no matter how much they work) would, according to economic theory result in less productivity. Employees are no longer incentivised to work as much as possible and, human nature being human nature, their productivity consequently decreases.

However, an analysis of the work output of tea pluckers in India following a government-mandated shift from mostly incentive to mostly wage-based compensation revealed a surprising result. Output actually increased.

Pluckers originally received a small baseline wage, with the rest of their compensation based on piece rates per kilogram of output. In addition, employees risked a ‘penalty’ if their output was below standard levels.

The contract change established a 30% higher baseline range, and eliminated the penalty. It also set a higher threshold for piece rates — the level of output at which piecemeal compensation would kick in.

Standard principle-agent theory is unequivocal about the results of the kind of flattening of incentives resulting from the new contract: worker output will decrease. Surprisingly, the data, which tracked the output of 2,000 workers for 5 weeks (one week before the contract change and four weeks after the contract change) revealed the opposite effect: output per worker increased by more than 80% (from 30 kg to 50 kg per worker) between the last week of August 2008 (just before the contract change) and September 2008.

Controlling for other factors that would contribute to the increase, such as rainfall, reduced the impact from an 80% increase to a 20% to 40% increase (depending on the other factors included). Nevertheless the result is still unequivocal: worker output increased, and increased significantly, instead of decreasing as the models predicted.

Could standard economic models such as standard principle-agent theory be wrong? Not so fast, say the researchers. In the first four weeks after the contract change, workers contradicted standard theory by increasing their output. However, the data on worker output over the next few months started steadily decreasing; within four months, output levels had returned to pre-contract levels.

While economic models explain the long-term results of the contract change, what happened in the short-term? After analysing and subsequently dismissing any other explanation (e.g. supervisory control, dynamic incentives such as an increased possibility of being fired), the researchers concluded that the unexpected increase in worker output was a behavioural response that rewarded the better deal with more worker effort.

The exact behavioural response in question is less clear. The best explanation might be gratitude and a sense of reciprocity for a wage increase of 30% (and even 44% if one counts the elimination of the penalty). The workers may also have been responding positively to the elimination of a punishment component in their compensation. Another behavioural explanation would be a type of Hawthorne effect, in which any novel change in the workplace results in higher productivity.

Whatever the explanation, the positive behavioural response would not last. In the four months after the contract change, worker output steadily decreased. After effective ruling out all other possible explanations for the decrease in worker output (for example, whether the plants were over-plucked in the post-change enthusiasm leaving less plants to be plucked), the researchers concluded that the reason for the reversal was that the behavioural response that inspired workers to work harder eventually faded — and economic theory took over. The data four months after the contract change match the predictions of the appropriate economic models. In short, economic theory prevailed after an initial behavioural detour.


The world of Indian tea pluckers may seem far removed from the concerns of big corporations and their thousands of cubicle-dwelling employees. The general lesson of the study, however, should not be ignored. When the response to an economic initiative or policy change shows evidence of a behavioural response that runs counter to the economic models, do not assume that the behavioural response is permanent. Any model-busting exuberance is probably short-lived. This short-lived exuberance could be used to justify other counter-intuitive initiatives, which could prove costly in the long run.

At the same time, the research does not unequivocally dismiss any and all behavioural response as ephemeral. The lesson, rather, is not to jump to conclusions without long-term evidence.



Anatomy of a Contract Change. Rajshri Jayaraman, Debraj Ray & Francis de Véricourt. American Economic Review (Forthcoming). 

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Idea conceived

November 30, 2015

Idea posted

Dec 2015
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