Relative pay — earnings compared with the earnings of others doing a similar job, or compared with one's earnings in the past — affects how much individuals would like to work (labor supply) and their effort on the job; it therefore has implications for both employers and policy makers. A...

An observed positive relationship between compensation and productivity cannot distinguish between two channels: (1) an incentive effect and (2) worker selection. We use a simplified Becker-DeGroot-Marschak mechanism, which provides random variation in piece rates conditional on revealed...