Abstract
In many professions and personal services, a firm offers a contract with either proportional revenue sharing of the worker’s output or a contract with 100% revenue accruing to the worker in exchange for a fixed (debt) payment. Contingent on the contract, the worker chooses the mechanism to achieve the desired level of productivity. A higher revenue split induces the worker to be more productive in output per hour resulting in a higher wage. The relevant price of effort is the after-split, after-tax wage controlled for after-tax household income. Incentives through a higher split raise productivity and the return to effort. The sample is 1,559 U.S. real estate sales professionals paid on contract splits in 2007 and choosing their hours and effort. The compensated labor supply elasticity is positive and between approximately zero and 0.3 suggesting the absence of income targeting for these workers on split and 100% revenue contracts. But the inclusion of contractual income split provisions in the model substantially increases the labor supply elasticity.
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Notes
In Ackerberg and Botticini (2002) a fixed rent is a more efficient contract because the tenant is providing the effort and is a residual claimant. This condition holds if the professional and firm have the same levels of risk aversion. Splits apply when the firm is more able to bear risk or the revenue streams are more uncertain.
In Headen (1990) a premium exists for entrepreneur doctors after adjustment for self-selection. Offsetting this effect is the scale in back-office billing and built-in referral networks from having hospitals owning medical practices. By 2008 more than half the doctors in the United States were working at practices owned by hospitals up from fewer than 20% in 2002, even if the front-office look remained the same. Rosen (1992) estimates similar structures for lawyers.
In Prendergast (2002) the assignment of incentive contracts depends on the risk of output. When output is less risky firms pay on input. When output is more risky, compensation is based proportionally on output. For professionals, output is not only individually observed but risky. The Holmström (1979) incentive compatibility constraints apply. Laeven and Levine (2008) evaluate contract terms.
Helland and Showalter (2009) use data from the Physician Practice Costs and Income Survey. A 1% severity increase in liability lowers effort by 0.3%. For doctors over age 55 the reduction in effort is 1.2% for a similar severity increase. Allowing the wage to be exogenous in the effort equation causes a downward bias in the measured elasticity. Another source of downward bias is if the wage is determined by dividing total earnings by hours. Under income targeting drivers are working harder when fares are scarce and less when there are more customers.
An example of 100% compensation is the Re/Max franchise where s = 1. Even firms such as Re/Max offering s = 1 in exchange for a debt payment will examine a broker’s prior sales performance and experience, for example, because the reputation of the franchise is based upon the abilities of their brokers.
In a recursive set of equations, the solution to the nth endogenous variable involves only the first n equations of the model, and therefore, the endogenous variables on the right-hand side of the equation s do not need to be correlated to the error terms.
Part-time workers defined as working less than 20 h per week are eliminated from the sample because they often sell properties to a social network of friends and family. The findings are largely the same when including part-time workers, but the inclusion of part-time workers creates a potential for sample selection bias. Part-time workers with relatively few hours are most often less experienced and tend to receive lower splits than full-time workers.
The exact percentage change requires the following transformation: y = e x where x is the regression coefficient. For convenience purposes, the estimates will be discussed without the transformation
The maximum is determined by solving for Exp in the following equation: \( \frac{{\delta Gross{ }Wages}}{{\delta Exp}} = 0 \)
This is equivalent to using fitted values for the endogenous variables in the model.
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The data for this study were provided by the National Association of Realtors®. We are grateful to John Benjamin, Paul Bishop and Michael Fratantoni for their contributions.
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Chinloy, P., Winkler, D.T. Contracts, Labor Supply and Income Targeting. J Labor Res 32, 113–135 (2011). https://doi.org/10.1007/s12122-011-9104-y
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DOI: https://doi.org/10.1007/s12122-011-9104-y