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Dynamic interaction and the ineffectiveness of incentives

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  • Rauber, Tom
  • Weinschenk, Philipp

Abstract

This article studies the effectiveness of financial incentives in a simple model in which a set of rational agents works on a joint project. We show that project success may become less likely and agents can be worse off if they face higher rewards. These success and payoff reversals arise naturally in dynamic interaction. Incentives can thus be ineffective in generating more favorable outcomes even though agents are perfectly rational. Our findings contribute to a better theoretical understanding of the prevailing empirical patterns of project delays and failures.

Suggested Citation

  • Rauber, Tom & Weinschenk, Philipp, 2025. "Dynamic interaction and the ineffectiveness of incentives," European Economic Review, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:eecrev:v:178:y:2025:i:c:s0014292125001448
    DOI: 10.1016/j.euroecorev.2025.105094
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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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