Content area
Full Text
Journal of Economic Perspectives-Volume 17, Number 1-Winter 2003-Pages 155-180
How can managers elicit the best performance from their workforce? Economists have written extensively on this question, often focusing on various types of incentive pay contracts aimed at eliciting greater effort from employees. This theoretical research identifies features of employment relationships that limit the effectiveness of simple piece-rate incentive pay plans and that force managers to consider other forms of incentive pay. In addition, managers introduce other human resource management practicesconcerning employee training, hiring criteria, teamwork, job design and employee hierarchies-that are aimed at eliciting optimal performance (see reviews in Gibbons, 1998; Gibbons and Waldman, 1999; Lazear, 1999; Murphy, 1999; and Prendergast, 1999). Still, without empirical evidence on businesses' human resource practices, it will remain an open question whether the theories proposed in "personnel economics [are] real or merely a series of clever models proposed by abstract thinkers who have little contact with reality" (Lazear, 1999).
In this study, we describe a new research approach-an approach we label "insider econometrics"-that is aimed at producing empirical estimates of the value of alternative human resource management practices. This "insider" approach goes deep inside businesses to understand how human resource management practices affect specific production processes. Using this insider approach, the analyst is guided by several basic principles: identify a narrow production process that can be modeled empirically; visit a significant sample of work sites that have that production process; conduct field research to understand the process thoroughly; interview a range of people to develop alternative views of the process and the human resource management practices; and finally gather accurate panel data on production, technology and organizational practices from the broadest possible sample of worksites using this process. In contrast both to survey research that collects very general heterogeneous data and thus estimates more questionable production functions and to case study research that does not provide econometric analysis, research based on these steps make it is possible to develop econometric estimates of the impact of organizational practices on performance. Moreover, discussions with industry insiders help interpret results concerning the performance effects of the practices and also offer insights about any limitations on the adoption of those practices. The obvious drawback of insider econometrics is that in studying a...