Pay incentives affect not only effort choice but also turnover and thereby the quality mix of the workforce. This paper investigates how considerations about the quality mix shape pay policy and pro…fits within a structural model of effort choice, symmetric learning about match quality, and turnover. Using unique data from a call centre in South Carolina, I estimate the model in two steps adapting estimation methods for dynamic structural models to the analysis of employment dynamics. Then, I consider three classes of contracts: (1) compensation depends only on current output; (2) compensation depends also on past output; (3) compensation depends on all available information and may vary with tenure. The results indicate that experimentation to improve the quality mix is a primary concern that affects the optimal contracts in the three classes. Experimentation requires high turnover which is also associated with the destruction of accumulated specific human capital. The trade-off between experimentation and the accumulation of specific capital determines the characteristics of the optimal contracts.
KEYWORDS: Piece Rates, Learning, Turnover

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