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Psychological Incentives, Financial Incentives, and Risk Attitudes in Tournaments: An Artefactual Field Experiment

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  • C. Bram Cadsby

    (Department of Economics and Finance, University of Guelph)

  • Jim Engle-Warnick

    (McGill University)

  • Tony Fang

    (Monash University)

  • Fei Song

    (Ryerson University)

Abstract

Tournaments are widely used to assign bonuses and determine promotions. Tournament-based compensation is motivating because of the link between relative performance and financial rewards. However, performing relatively well (poorly) may also yield psychological benefits (pain). This may also stimulate effort. Through a real-effort artefactual field experiment with factory workers in China, we examine how both psychological and financial incentives, together with attitudes toward risk, may influence motivation and performance. For comparison purposes, Chinese undergraduate students also participated in a comparable laboratory experiment. We provided performance-ranking information both privately and publicly, with and without rank based financial incentives. Our results show that performance-ranking information had a significant motivational effect on average performance for students, but not for workers. Adding financial incentives based on rank provided little evidence of further improvements. Much of the difference between workers and students can be explained by differences in attitudes toward risk. Indeed, for both groups the size of both financial and psychological incentive effects is inversely related to individual levels of risk aversion, and is positive and significant both for workers and for students who are sufficiently risk-tolerant. Lastly, performance did not deteriorate when incentives were removed, suggesting that they worked through the encouragement of learning.

Suggested Citation

  • C. Bram Cadsby & Jim Engle-Warnick & Tony Fang & Fei Song, 2014. "Psychological Incentives, Financial Incentives, and Risk Attitudes in Tournaments: An Artefactual Field Experiment," Working Papers 1403, University of Guelph, Department of Economics and Finance.
  • Handle: RePEc:gue:guelph:2014-03
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    More about this item

    Keywords

    incentives; social comparison; performance feedback; peer pressure; tournament; risk aversion; artefactual field experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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