CHAPTER 38The Limits of Homo Economicus: Employees Underperform If Their Performance‐Based Bonus Hurts Their Colleagues’ Bonus
Classical economics assumes that employees work better if the amount of their remuneration depends on whether they render a better performance than their colleagues. Modern behavioral economics shows that belief in the effects of relative pay can be a costly mistake when considerations of fairness come into play.
Francisco has been picking apples since early in the morning. After eight hours on the apple orchard, his back hurts. Working alongside him in his row is Antonio, whom Francisco saw for the first time today although Antonio has been working as a harvest hand on the huge orchard for a couple of weeks. Antonio works fast. In the next row, Francisco sees his friend Pedro, with whom he shares accommodations and who has a bad cold, so he cannot work so fast today. Next to Pedro there are faces he doesn’t know. Each worker can see how quickly the other one fills his basket and how often during the day a worker carries his basket to the collecting point. There, the apples a worker has picked are weighed.
The daily earnings are based on the total weight of apples harvested by the worker on this particular day. The company running the apple orchard pays workers according to their relative performance. This means that the harvesting output of one worker is initially divided by the average output of all workers on the apple orchard. The lower the resulting ...