Pay Enough - Or Don't Pay at All
AbstractAbstract: Economics seems largely based on the assumption that monetary incentives improve performance. By contrast, a large literature in psychology, including a rich tradition of experimental work, claims just the opposite. In this paper we present and discuss a set of experiments designed to test the effect of different monetary compensations on performance. In our experiments we find that whenever money is offered, a larger amount yields a higher performance. It is not true, however, that offering money always induces a higher performance: participants who were offered a small payoff gave a worse performance than those who were offered no compensation at all. These results suggest that the behavior of participants is influenced by their perception of the contract that is offered to them. When the contract offers money the environment is perceived as monetary, and participants respond in a qualitatively different way in monetary and non-monetary environments. In a different set of experiments we test subjects who, acting as principals, have to provide the appropriate incentive to agents. We show that principals do not anticipate the drastic difference in behavior. The vast majority of principals seem to think incorrectly that a larger compensation is unambiguously a better incentive.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1998-57.
Date of creation: 1998
Date of revision:
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Web page: http://center.uvt.nl
Monetary incentives; performance; motivation; principal-agent;
Other versions of this item:
- D1 - Microeconomics - - Household Behavior
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D9 - Microeconomics - - Intertemporal Choice
This paper has been announced in the following NEP Reports:
- NEP-SPO-1998-07-20 (Sports & Economics)
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- Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
- Akerlof, George A & Yellen, Janet L, 1988. "Fairness and Unemployment," American Economic Review, American Economic Association, vol. 78(2), pages 44-49, May.
- Frey, Bruno S & Oberholzer-Gee, Felix & Eichenberger, Reiner, 1996. "The Old Lady Visits Your Backyard: A Tale of Morals and Markets," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1297-1313, December.
- Frey, Bruno S & Oberholzer-Gee, Felix, 1997. "The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out," American Economic Review, American Economic Association, vol. 87(4), pages 746-55, September.
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- Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 255-83, May.
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