Method of pay in Finnish industry

In this paper, a dynamic economic model of the method of pay is derived to serve as a background to an empirical study. The model gives, for example, a prediction that employees who have a short attachment to a firm are apt to engage in incentive work. Special attention is paid to unobserved heterogeneity across workers in a legit model of the method of pay. A new estimator based on a small variance approximation of unobserved heterogeneity is derived.