Incentives and Gaming in a Nonlinear Compensation Scheme and the Influence of Ethnicity -Evidence from Transaction Data in North American Auto Dealerships-

M5

J31

J33

This paper examines the incentive effect of a discontinuous and nonlinear compensation scheme, using transaction data provided by two North American auto dealerships. The paper also investigates the influence of ethnicity on customer-salesperson transactions. Under the nonlinear scheme, a salesperson's expected daily commission revenue critically depends on his position in the pay schedule on the day. We find that a measure of time-varying incentive intensity has a positive effect on the distribution of daily sales, suggesting that salespersons adjust their effort levels in response to the intensity of the incentive. On the other hand, incentive intensity has a negative impact on the dealership's gross profit rate, suggesting that employees are gaming the system by lowering the prices they offer customers in order to achieve more sales and larger commissions. We finally find a higher rate of successful deal completion when the salespersons and customers are of the same ethnicity. However, we find no evidence that this tendency is explained by salespersons offering lower prices to customers who share their ethnicity.