Shirking may exist in any wage contract and
can be costly to prevent. Piece-rate contracts are
preferred to hourly wages if monitoring output
. costs less than enforcing input Cheung, 1969 ,
while such contracts also reveal productivity dif-
ferentials among workers more clearly than any
. other payment scheme Cheung, 1983 . However,
with piece rates the worker is inclined to be
‘sloppy’ and produce products of inferior quality,
that is, to exploit opportunities to shirk on qual-
ity. Thus, piece rates may be less desirable if the
physical attributes of the product are such that it
is relatively costly to police a specified standard.
The root of the problem lies with high informa-
tion costs; it is necessary to recognize that firms