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The Effectiveness of Incentive Schemes in the Presence of Implicit Effort Costs

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  • Sebastian J. Goerg

    () (Technical University of Munich, 94315 Straubing, Germany; Max Planck Institute for Research on Collective Goods, 53113 Bonn, Germany; IZA Institute of Labor Economics, 53113 Bonn, Germany)

  • Sebastian Kube

    () (Max Planck Institute for Research on Collective Goods, 53113 Bonn, Germany; IZA Institute of Labor Economics, 53113 Bonn, Germany; University of Bonn, 53113 Bonn, Germany)

  • Jonas Radbruch

    () (IZA Institute of Labor Economics, 53113 Bonn, Germany; University of Bonn, 53113 Bonn, Germany)

Abstract

Agents’ decisions to exert effort depend on the incentives and the potential costs involved. So far, most of the attention has been on the incentive side. However, our laboratory experiments underline that both the incentive and the cost side can be used separately to shape work performance. In our experiment, subjects work on a real-effort slider task. Between treatments, we vary the incentive scheme used for compensating workers. Additionally, by varying the available outside options, we explore the role of implicit costs of effort in determining workers’ performance. We observe that incentive contracts and implicit costs interact in a nontrivial manner. In general, performance decreases as implicit costs increase. Yet the magnitude of the reaction differs across incentive schemes and across the offered outside options, which, in turn, alters estimated output elasticities. In addition, comparisons between incentive schemes crucially depend on the implicit costs.

Suggested Citation

  • Sebastian J. Goerg & Sebastian Kube & Jonas Radbruch, 2019. "The Effectiveness of Incentive Schemes in the Presence of Implicit Effort Costs," Management Science, INFORMS, vol. 65(9), pages 4063-4078, September.
  • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:9:p:4063-4078
    DOI: 10.1287/mnsc.2018.3160
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    Cited by:

    1. Sausgruber, Rupert & Sonntag, Axel & Tyran, Jean-Robert, 2019. "Disincentives from Redistribution: Evidence on a Dividend of Democracy," CEPR Discussion Papers 13773, C.E.P.R. Discussion Papers.
    2. Chen, Si & Schildberg-Hörisch, Hannah, 2018. "Looking at the Bright Side: The Motivation Value of Overconfidence," IZA Discussion Papers 11564, Institute of Labor Economics (IZA).
    3. Benndorf, Volker & Rau, Holger A. & Sölch, Christian, 2019. "Minimizing learning in repeated real-effort tasks," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 239-248.
    4. Schildberg-Hörisch, Hannah & Trieu, Chi & Willrodt, Jana, 2020. "Perceived Fairness and Consequences of Affirmative Action Policies," IZA Discussion Papers 13202, Institute of Labor Economics (IZA).
    5. Boosey, Luke & Goerg, Sebastian J., 2018. "The Timing of Discretionary Bonuses: Effort, Signals, and Reciprocity," IZA Discussion Papers 11580, Institute of Labor Economics (IZA).
    6. David Gill & Zdenka Kissová & Jaesun Lee & Victoria Prowse, 2019. "First-Place Loving and Last-Place Loathing: How Rank in the Distribution of Performance Affects Effort Provision," Management Science, INFORMS, vol. 65(2), pages 494-507, February.
    7. John Sseruyange & Erwin Bulte, 2020. "Wage Differentials and Workers’ Effort: Experimental Evidence from Uganda," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(3), pages 647-668, June.

    More about this item

    Keywords

    workers’ performance; work environments; implicit cost; opportunity costs; incentive schemes; experiment;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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