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Exploitation Aversion: When Financial Incentives Fail to Motivate Agents

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  • Carpenter, Jeffrey P.

    ()
    (Middlebury College)

  • Dolifka, David

    (Middlebury College)

Abstract

Empirical studies of the principal-agent relationship find that extrinsic incentives work in many instances, linking rewards to performance increases effort, but that they can also backfire, reducing effort. Intrinsic motivation, the internal drive to work to master a skill or to improve one's self image, is thought to be the key to whether incentives work or not. If the incentives crowd-out intrinsic motivation, and the effect is large enough, the net motivational effect on effort will be negative. We posit that an aversion to being exploited, i.e. being used instrumentally for the benefit of another, is one facet of intrinsic motivation, triggered by the combination of high-powered incentives and egoistic principal intent, that can cause incentives to fail. Using an experiment that provides the material circumstances necessary for exploitation to occur, we find that agent compliance is significantly lower for exploitative principals who use high-powered incentives and have a financial interest to do so, compared to neutral principals who use the same contracts but do not benefit from them. To corroborate our interpretation of the results we show that a surveyed "exploitation aversion" scale moderates this effect. Exploitation averse participants are less likely to comply with the incentives than exploitation tolerant participants when the principal signals an exploitative intent, but they are no less likely to comply with the same incentives when the principal is neutral. Our results have implications for the design and implementation of incentive structures within organizations.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7499.

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Length: 30 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7499

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Keywords: financial incentives; intrinsic motivation; crowding; exploitation; experiment;

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  1. Mellström, Carl & Johannesson, Magnus, 2005. "Crowding Out in Blood Donation: Was Titmuss Right?," Working Papers in Economics 180, University of Gothenburg, Department of Economics, revised 08 Feb 2008.
  2. Jeffrey Carpenter & Caitlin Knowles Myers, 2010. "Why Volunteer? Evidence on the Role of Altruism, Image, and Incentives," Middlebury College Working Paper Series 1023, Middlebury College, Department of Economics.
  3. Bartling, Björn & Fehr, Ernst & Schmidt, Klaus M., 2012. "Use and Abuse of Authority: A Behavioral Foundation of the Employment Relation," IZA Discussion Papers 7029, Institute for the Study of Labor (IZA).
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  5. Samuel Bowles & Sandra Polania-Reyes, 2012. "Economic Incentives and Social Preferences: Substitutes or Complements?," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 368-425, June.
  6. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer, vol. 5(1), pages 5-27, June.
  7. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  9. Bruce Shearer, 2004. "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 513-534.
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