Max Planck Institute for Innovation and Competition, Munich, Room 313
It is by now well-documented that performance pay has positive effort and selection effects in routine, easy to measure tasks, but its effect in knowledge creation is much less understood. This paper studies the effect of performance pay on knowledge creation through effort and selection effects using the introduction of performance pay in German academia as a natural experiment. To this end, I consolidated information from various, unstructured data sources to construct a data set that encompasses the affiliation history and publication records of the universe of academics in Germany. The performance pay reform introduced attraction and retention bonuses, as well as relatively weaker on-the-job performance bonuses that take effect at a later point in time. I estimate the pure effort effect of these performance pay incentives in a difference-in-differences framework, comparing changes in research productivity of a treated cohort of academics, who receive performance pay because they started their first tenured position after the reform, with a control cohort that receives flat wages because they started their first tenured position just before the reform. I find a positive effort effect of performance pay that is economically large; amounting to a 12 to 16% average increase in research productivity. This increase manifests itself most robustly as an increase in research quantity and persists for a number of years. The effort response is strongest and most robust for less productive academics, with increases in pure quantity as well as quality-adjusted research output, while the average impact of the work of top quartile academics decreases. Performing textual analysis on paper abstracts to construct novelty and impact metrics, I find that the novelty of the work of top quartile academics declines. This work however does find more follow-on research in subsequent papers in the same field and is thus more impactful. I estimate the selection effect by analyzing the rate at which academics of different productivity levels switch to the performance pay scheme. I use the fact that the old and new wage schemes compare differently for academics at different ages, which gives rise to selection incentives that are inversely related to age. Exploiting this variation in a difference-in-differences framework, I find that more productive academics are more likely to select into performance pay. Hence, performance pay increases research output in academia through both effort and selection effects. However, because the effort effect is strongest for relatively less productive academics, while relatively more productive academics select into performance pay, the selection effect partially counteracts the impact of the effort effect.
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