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The Impact of Uncertainty on Incentive Framing Effectiveness in a Multidimensional Task Environment

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    In this paper, an experiment was conducted in a multidimensional environment to examine the incentive framing effectiveness under conditions of uncertainty, as opposed to certainty. Whereas previous research generally has treated uncertainty as an indivisible concept, this paper proposes a framework from which it is clear that several sources of uncertainty exist, each influencing a different part of the proposed effort-outcome relationship. A comparison was made between certainty and uncertainty, stemming from uncontrollable factors respectively imperfect monitoring. The results indicate that it is valuable to use penalty-framed incentives under certainty conditions, and that performance is higher under certainty than under conditions with either source of uncertainty. The reason lies in a higher level of effort intensity and more efficient effort allocation. Furthermore, it seems that penalty schemes induce higher performance than bonuses under imperfect monitoring, while incentive framing has no effect under uncertainty stemming from uncontrollable factors. The latter results, under uncertainty conditions, can be explained by differences in risk attitude and perceived risk.

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    Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 06/399.

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    Length: 48 pages
    Date of creation: Jul 2006
    Handle: RePEc:rug:rugwps:06/399
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    1. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
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