Wednesday, April 19, 2006

Pay Enough or Don't Pay at All

Following up on the earlier post on the fact that monetary incentives might lead to worse outcomes, a paper by Uri Gneezy and Aldo Rustichini further confirms that monetary incentives can actually reduce performance. However, they also find that larger monetary incentives do increase performance. The paper can be found here. Here is the abstract:

Economists usually assume that monetary incentives improve performance, and psychologists claim that the opposite may happen. We present and discuss a set of experiments designed to test these contrasting claims.

We found that the effect of monetary compensation on performance was not monotonic. In the treatments in which money was offered, a larger amount yielded a higher performance. However, offering money did not always produce an improvement: subjects who were offered monetary incentives performed more poorly than those who were offered no compensation. Several possible interpretations of the results are discussed.

Their results are based on two experiments. In the first experiment, students answered questions on a test which largely tested effort. All students were promised a fixed payment for participation; however, some students were paid an additional sum based on the number of questions they answered correctly. One group was given 10 cents per correct answer, another $1 per correct answer, and another $3 per correct answer. The group getting 10 cents per correct answer performed significantly worse than the group not getting any additional payment (and this group did worse then the $1 and $3 groups).

In the second experiment, the researchers introduced incentives to a public service day which occurs regularly in Israel. Apparently, certain days during the year students take to the streets to collect donations for various causes. Three groups of students were studies. In one group, no additional incentives were introduced. In another group students received 1 percent of what they raised. And in the other group they received 10 percent of what they raised. In both of the treatment groups it was made clear that the money was being paid by the researchers and was not coming out of the money that was being raised. Again, the no treatment group out performed the small incentive group, and in this experiment they equaled the high treatment group.

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