Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

Abstract: Earlier studies of the impact of performance pay on individuals’ behavior have primarily been concerned with the effects on their earnings and productivity. The productivity increases associated with the adoption of performance pay practices may, however, come at the expense of quality of life at or outside work. In this paper we study the effect on the employees’ out-of-work activities, testing whether performance pay contracts lead to a “time squeeze” for non-work activities. In doing so, we distinguish between two effects, a substitution effect and a discretion effect. On the one hand, since the marginal payoff to work is higher under a performance pay contract, employees will work more and spend less time on private activities (substitution effect). On the other hand, to the extent that employees have some choice over their work hours, if employees are more productive they can do the same job in less time and have more spare time for private activities (discretion effect). We distinguish between those services that the employee can buy in the market (e.g., cleaning, cooking) and leisure activities (e.g., sports, cultural activities).

Keywords: Performance pay; Out-of-work activities; Time allocation; Work-family balance

JEL-codes: J22; J33; M52

35 pages, January 1, 2007

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