Using data from the BLS Industry Wage Survey, the author tests the theory that firms choose their methods of pay by balancing the gains from more precise links between performance and pay against monitoring costs. The results confirm most of the predictions from the general theory. For example, large firms make significantly greater use of standard-rate pay than do small firms, and incentive pay (such as piece rates) is less likely in jobs with a variety of duties than in jobs with a narrow set of routines.
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