A. We pointed out last week that while paying workers according to output can be an effective way of increasing effort and can also have positive ethical consequences, it also has many ethical pitfalls. Last week we talked about output, and income, suffering for reasons beyond the worker's control, and the problem of sabotaging cooperation. This week we will continue with two other considerations we mentioned last week briefly:
• Workers may end up favoring output over quality, leading to declines in product quality;
• Workers may end up favoring output today over output tomorrow, and scrimp on maintenance etc. in order to reap bonuses in the short run.
The problem of distortionary incentives presented itself in ancient times, particularly in the context of sharecropping. Very often landowners were unable to or uninterested in farming all their land by themselves or using hired workers, and rented out the land to sharecroppers. In order to give the farmer an incentive to work hard and pro
duce a large crop, a sharecropper is given a fixed fraction of the crop, which varies depending on market conditions. This arrangement persists in various forms even today.
The mishna and Talmudic discussion in the ninth chapter of tractate Bava Metzia examine in detail the arrangements that developed to manage the conflicting incentives in leasing land. The same conflicts exist today, and can be managed using similar management techniques.
One problem with this arrangement is that the sharecropper may neglect maintenance or be indifferent to depreciation of the land. The depreciation is borne by the owner.
The chapter begins with the following mishna:
One who leases a field from his fellow: where it is customary to gather, he must gather; to uproot, he must uproot; to plow after [harvesting], he must plow; everything is according to local custom.
While an owner-operator is free to make his own decisions about the way to cultivate his field, a sharecropper will be tempted to take shortcuts that will affect output in future years. For example, he may want to neglect plowing over the field after the harvest, since this will only affect yields in the following year or years.
Another problem is producing in a way that depletes the field, which in a modern business context might express itself as increased depreciation.
One who leases a field from his fellow [on the condition] to plan barley, may not plant wheat [which depletes the field more]. To plant wheat, he may plant barley.
The sharecropper is entitled to exercise a certain amount of judgment regarding what to plant; indeed, one object of the sharecropper relationship is to decentralize and allow him to take advantage of his own familiarity and expertise. But this cannot be at the expense of the long-term viability of the field.
Even in the middle of the season a sharecropper may decide it is not worth his while to invest in a good crop since he only enjoys part of the yield. Thus even intra-season maintenance is regulated:
One who lets a field from his fellow and doesn't want to weed, and says [to the owner]: What do you care, since I give you your rental? We don't accept his claim, for [the owner] can say to him: Tomorrow you may leave, and it is left with weeds.
LONG TERM RELATIONSHIP
The mishna equally recognizes that these issues are partly overcome by creating a long-term relationship:
One who lets a field for few years may not sow flax, and is not entitled to sycamore branches. If he leases it for seven years, he may sow flax the first year, and he is entitled to sycamore branches.
If the field is leased for a long time, then the sharecropper will feel himself the negative effects of the flax, which depletes the field. So this decision can be left for him.
Another potential problem is that quality could be compromised. While the sharecropper shares some of the cost of reduced quality, some is borne by the owner.
LACK OF EFFORT
Another possibility of monetary incentives is that they may backfire. A regular employee faces a take-it-or-leave-it situation. If he doesn't do everything demanded of him he gets fired. But an "incentivized" employee has a choice. He can work harder than usual and get more, but he can also decide to work less hard and get less. The mishna deals with this problem by obligating the tenant to farm the land as long as it has some minimal potential:
One who leases a field from his fellow and it didn't produce [much]: if there is enough to assemble a stack, he is obligated to tend it.
This bears an interesting reciprocal relationship with the previous consideration. In order to overcome some of the other incentive problems, there may be a desire to lock the employee into a long-term relationship. Yet this "solution" can create its own problem of under-incentivization.
As we emphasized last week, these considerations do not imply that performance-related-pay is always a bad idea. On the contrary, the sharecropper relationship was a very popular and widespread arrangement. The lesson we do learn is that these arrangements require careful thought to manage the conflicted incentives involved.