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

Author

Listed:
  • Goerg, Sebastian J.

    (Technische Universität München)

  • Kube, Sebastian

    (University of Bonn)

  • Radbruch, Jonas

    (Humboldt University Berlin)

Abstract

Agents' decisions to exert effort depends on the provided incentives as well as the potential costs for doing so. So far most of the attention has been on the incentive side. However, our lab experiments underline that both the incentive and cost side can be used separately to shape work performance. In our experiment, subjects work on a real-effort 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 non-trivial manner. Performance reacts significantly to changes in implicit effort costs under low-powered piece-rate and target-based bonus contracts, but not under a high piece rate contract. In addition, comparisons between the incentive schemes depend crucially on the implicit costs.

Suggested Citation

  • Goerg, Sebastian J. & Kube, Sebastian & Radbruch, Jonas, 2017. "The Effectiveness of Incentive Schemes in the Presence of Implicit Effort Costs," IZA Discussion Papers 10546, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp10546
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    More about this item

    Keywords

    incentive schemes; workers' performance; work environments; implicit cost; opportunity costs;
    All these keywords.

    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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