Saturday, February 11, 2006
The Power of Incentives -- Seth and Summer Edition
On the most recent episode of The OC, Seth and Summer's relationship was in trouble. Summer had caught Seth lying again, and she demanded that he do "something big" in order to regain her trust. After his initial attempts failed, Seth wrote out a list of his various transgressions and instructed Summer to give it to his parents if she caught him lying again. Knowing that Seth now had the appropriate incentives to be trustworthy, Summer took him back. Kudos to Seth for using such sound economic reasoning to solve his relationship woes.
Economists refer to this activity as "posting a bond." Many economists argue that firms should demand similar commitments from employees. The idea is that if I have placed a large sum of money in an account that the firm gets to keep if I am caught violating the terms of our work agreement, then I will be less likely to slack off because the marginal cost of shirking, etc. is much higher.
Economists refer to this activity as "posting a bond." Many economists argue that firms should demand similar commitments from employees. The idea is that if I have placed a large sum of money in an account that the firm gets to keep if I am caught violating the terms of our work agreement, then I will be less likely to slack off because the marginal cost of shirking, etc. is much higher.
// posted by BW @ 5:16 PM 
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One of the main reasons that is cited for why firms don't require bonds from their employees is credit constraints. To be effective, these bonds would need to be fairly large, and certainly many employees wouldn't have the money to post them. Of course, there are a number of ways to solve this problem, so I don't think that this is likely to explain it.
I used to argue that I thought that it would violate basic social norms (it is not great to start a relationship off by implicitly saying I don't trust you) and produce a backlash against any employer who tried to institute it. I am not sure I still beleive this.
It could also be that introducing explicit financial incentives would actually complicate the problem. In order to for this to work, there has to be a very clear contract which specifies exactly what will cost you the bond. So you would likely improve behavior on the dimensions specified in the contract, but you might erode the general feelings of obligation that govern a variety of other behaviors.
A semi-related example of this (which I can't remember where I read about it), is a day-care center that was struggling to get parents to pick up their kids on time. In order to incentivize the parents, the center started assessing fines to late parents. However, in the fine regime more parents picked up their kids late. Before parents felt guilty about being late. Once it became something that they could essentially buy their way out of, they didn't hesitate to do this.
I used to argue that I thought that it would violate basic social norms (it is not great to start a relationship off by implicitly saying I don't trust you) and produce a backlash against any employer who tried to institute it. I am not sure I still beleive this.
It could also be that introducing explicit financial incentives would actually complicate the problem. In order to for this to work, there has to be a very clear contract which specifies exactly what will cost you the bond. So you would likely improve behavior on the dimensions specified in the contract, but you might erode the general feelings of obligation that govern a variety of other behaviors.
A semi-related example of this (which I can't remember where I read about it), is a day-care center that was struggling to get parents to pick up their kids on time. In order to incentivize the parents, the center started assessing fines to late parents. However, in the fine regime more parents picked up their kids late. Before parents felt guilty about being late. Once it became something that they could essentially buy their way out of, they didn't hesitate to do this.
Nice point, Bryce. The kinds of jobs that could easily be measured for confiscating the bond are probably lower-paying bonds, for which workers are even less likely to have access to funds. For high-paying jobs (where people could conceivably post a significant bond), performance tends to be more difficult to measure.
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