IAAEU Discussion Paper Series in Economics 08/2014
By conducting a natural field experiment, we test whether a managerial policy of allowing employees to self-determine their wages is as successful as recently suggested by laboratory evidence. We find that this policy indeed enhances performance. However, our data is clearly at odds with the conjecture of Pareto improvements, since labor costs grow even faster. Admittedly, the performance change is remarkable given that a considerable pay increase has no effect at all. Surprisingly, the data suggests that explicitly denying parts of the workforce this choice boosts performance, too. Additional experimental and survey data provides important insights into employees' underlying motivations.