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Give Me a Challenge or Give Me a Raise

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  • Aleksandr Alekseev

    (Economic Science Institute, Chapman University)

Abstract

I study the effect of task difficulty on workers' effort and compare it to the effect of monetary rewards in an incentivized lab experiment. I find that task difficulty has an inverse-U effect on effort, and that this effect is quantitatively large when compared to the effect of conditional monetary rewards. Difficulty acts as a mediator of monetary rewards: conditional rewards are most effective at the intermediate or high levels of difficulty. I show that the inverse-U pattern of effort response to difficulty is not consistent with the Expected Utility model but is consistent with the Rank-Dependent Utility model that allows for non-linear probability weighting. I structurally estimate the model and find that it successfully captures the treatment effects observed in the data. I discuss the implications of my findings for the design of optimal incentive schemes for workers and modeling effort.

Suggested Citation

  • Aleksandr Alekseev, 2019. "Give Me a Challenge or Give Me a Raise," Working Papers 19-21, Chapman University, Economic Science Institute.
    • Handle: RePEc:chu:wpaper:19-21
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    File URL: https://digitalcommons.chapman.edu/esi_working_papers/280/
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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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