Incentives and Social Preferences in a Traditional Labor Contract: Evidence from Rice Planting Experiments in the Philippines

Abstract

This paper investigates the interplay between economic incentives and social norms in formulating rice planting contracts of the Philippines. Intriguingly, in our study area, despite the potential of infestation of opportunistic behaviors by workers, a fixed wage (FW) contract has been dominant for rice planting since the 1960s. To account for such a seemingly-inefficient contractual arrangement, we conduct field experiments by randomly assigning three distinct labor contracts, i.e., FW, individual piece rate (IPR), and group piece rate (GPR) contracts. Individual workers_p’ /performance data from field experiments are then combined with data on social preferences elicited by laboratory experiments. Five main empirical findings emerge. First, our basic results show the positive incentive effects in IPR, moral hazard problems in FW, and free-riding behavior in GPR, which are consistent with standard theoretical implications. Second, while, under FW, social preferences such as altruism and guilt aversion play an important role in stimulating incentives, introducing monetary incentives crowds out such intrinsic motivations. Third, other non-monetary factors such as self-selection of team members and social connections significantly change incentives under FW contract. Fourth, as alternative hypotheses, our empirical results are consistent with the hypothesis of intertemporal incentives arising from performance based contract renewal probabilities. Our results are also supportive to implications of the interlinked contract of labor and credit transactions in mitigating moral hazard problems. Yet, we reject the optimality of FW contract due to large effort measurement errors.