Rosario Macera from UC Berkeley was here yesterday, giving her jobmarket paper on loss aversion and wage contracts. I am not an expert in the field, and have to admit that I haven't thought much about the fact that monthly pay is mostly fixed, and variable pay arrives on a yearly basis. If you think about it, piece rates sound just like what Dr Smith ordered -- pay changes 1:1 with measured output. Sure, measuring output can be hard (try to assess the productivity of an academic, say...), but there must be many jobs where this is possible. Nonetheless, it's super-rare. Good science is all about making one look at something that seems obvious and not in need of thought, and turning it into an interesting research question. Rosario's talk did that for me (perhaps because I know less than most of the topic). She married a pretty standard setup with some loss aversion, and derived the optimal wage contract, which ... you guessed it, looks a lot like real life.
Now, as an economic historian, I couldn't help wondering... we used to live in a world with LOTS of piece rate work, plus a daily threat of dismissal (or not being re-hired). Why is it that 19th century labor markets didn't create the same kind of long-run stability, given that workers (in a way) are willing to "overpay" for stable paychecks? Standard stories of why we get long-term contracts focus on either the rise of unions, or on the different skill requirements in modern industry. But this can't be quite right -- even in textiles, where work is (for all I know) very similar today to what it was 100 years ago, there is much less work under piece rate contracts. Ditto in the mines. So are people more loss-averse today? Does the rise of mortgage debt and auto financing mean that, despite much fatter paychecks overall, people hate any decline in their income much more? Anyway, its nice to come away from a jobtalk and have many more things to think about than before... and good luck to Rosario.