SALARIES OR PIECE RATES: ON THE ENDOGENOUS MATCHING OF HARVEST WORKERS AND CROPS

Abstract

The objective of this paper is to determine whether the choice of payment schemes (hourly vs. piece rates) is systematically related to the workers' risk aversion and ability. We derive the equilibrium relationship between agents' risk aversion and ability and the power of incentives (payment scheme) in a market where many heterogeneous principals and agents are endogenously matched. The equilibrium matching between principals and agents depends on the traits and is critical in determining the contract choice. Using confidential data from the National Agricultural Workers Survey (NAWS), we find evidence of matching between agricultural workers and the riskiness of their jobs (crops they harvest) based on workers' risk aversion and no matching based on ability. When controlling for matching, we find strong evidence that high risk‐averse workers choose hourly rates and low risk‐averse workers choose piece rates. We also found that high ability types choose piece rates and low ability types choose hourly rates but the evidence is weaker. (JEL J33, D82, Q12)