Knowledge Sharing and Incentive Design in Production Environments: Theory and Evidence

Abstract

ABSTRACT:We develop and empirically test a parsimonious model of how specific knowledge and the value of knowledge sharing influence manufacturing plants' incentive design choices. Our results confirm the prediction that increases in the extent of agents' specific knowledge and the value of knowledge sharing are associated with greater (less) reliance on output (input) performance measures. Moreover, consistent with our model's prediction, we find that plants rely more on group‐based (as opposed to individual‐based) output performance measures when the value of knowledge sharing is higher, or the extent of agents' specific knowledge is lower. Finally, consistent with previous research, we find that as output performance measures become noisier, firms rely less on these measures in incentive contracts.