The Impact of Family Characteristics on Reactions to Compensation Incentives

Abstract

This dissertation examines the impact of family characteristics on workers' reactions to compensation incentives. Workers' reactions to incentives refer to workers' job choices based on incentives and workers' effort supply in the job with incentives. Developing a theoretical model that extends the standard model of effort, this dissertation explicitly incorporates family characteristics (i.e., the employment status of spouse, child characteristics such as the number of children and the age of child, and the presence of alternative family income sources) into a workers' effort supply function. The key theoretical linkages in the model involve income targets, loss aversion, and time and energy constraints. The model predicts that these family characteristics would have impacts on workers' effort through three theoretical channels. The model also implies that workers associated with different family characteristics would sort themselves into different jobs based on the presence of incentive pay. The reduced-form relationships between family characteristics and reactions to incentives are analyzed using data from the Panel Study of Income Dynamics (PSID) and the American Time Use Survey (ATUS). The results show that workers with different family characteristics, such as the number of children, sort themselves into different jobs based on the presence of incentive pay in the job. Moreover, the results weakly support the importance of family characteristics on workers' effort supply as measured by the amount of incentive pay the worker received in their job. Furthermore, using detailed time use variables from the ATUS reveals the role of an underlying mechanism-time constraints on work-by which the relationships occur. By shedding light on a previously unexplored role that family characteristics play, this dissertation adds a novel perspective to heterogeneous responses to compensation incentives by workers.