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Coautor: Francesco Amodio (McGill University)
This paper studies how unobserved heterogeneity affects the response to incentives at the workplace. We develop a simple principal-agent model with asymmetric information over input quality and worker type, and test the model pre- dictions using personnel data from a Peruvian egg production plant. Exploiting a salient change in the worker salary structure, we show that heterogeneity along both margins of input quality and worker type significantly affects workers’ effort choice differentially after the implementation of the new incentive regime. We also find evidence that the change triggers learning among peers over the shape of the production function. Our study and results highlight how the presence of information asymmetries and imperfections in general affects the extent to which monetary incentives at the workplace shape workers’ effort choice and increase firm profits.