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ENOUG OR DON AT ALL RI NEEZY AND LDO USTICHINI Economist usuall assum tha moneta

NTRODUCTION Accordin to standar economi reasoning an increas in th nancia incentive provide fo an activit wil improv perfor mance Thi predictio is conclusio of ver basi assumption in economi theory performanc is positivel relate to effort effor is u

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ENOUG OR DON AT ALL RI NEEZY AND LDO USTICHINI Economist usuall assum tha moneta






Presentation on theme: "ENOUG OR DON AT ALL RI NEEZY AND LDO USTICHINI Economist usuall assum tha moneta"— Presentation transcript:

PAYENOUGHORDONTPAYATALL*URIGNEEZYANDALDORUSTICHINIEconomistsusuallyassumethatmonetaryincentivesimproveperformance,andpsychologistsclaimthattheoppositemayhappen.Wepresentanddiscussasetofexperimentsdesignedtotestthesecontrastingclaims.Wefoundthattheeffectofmonetarycompensationonperformancewasnotmonotonic.Inthetreatmentsinwhichmoneywasoffered,alargeramountyieldedahigherperformance.However,offeringmoneydidnotalwaysproduceanimprovement:subjectswhowereofferedmonetaryincentivesperformedmorepoorlythanthosewhowereofferednocompensation.Severalpossibleinterpreta-tionsoftheresultsarediscussed.I.IAccordingtostandardeconomicreasoning,anincreaseinthenancialincentivesprovidedforanactivitywillimproveperfor-mance.Thispredictionisaconclusionofverybasicassumptionsineconomictheory:performanceispositivelyrelatedtoeffort;effortisunpleasant,andmoneyisgood.Weshouldthereforeobserveamonotonicandincreasingrelationshipbetweenmone-tarycompensationforanactivityandtheperformancelevelofthatactivity.1Themainaimofthispaperistoprovideatestofthisprediction,inacontrolledlaboratoryenvironment,whichpaysparticularattentiontothecomparisonbetweenthetotalabsenceandthepresenceofmonetaryrewards.Ourmainresultisthatperformancevariesinanonmonotonicwaywithincentives.Themonotonicrelationshippredictedbythetheorymayfailinconcretesituations,eitherinreallifeorinexperiments,becausefactorsdifferentfrommoneyandeffortmayenterintothedecisionoftheagent.Forinstance,apersonmaybereluctanttoworkforverysmallcompensationbecausethisfactmightsignalhisgeneralwillingnesstoacceptasmallwage,andthusweakenhisfuturebargainingposition.Adifferentreason,whichismorecommonlysuggestedintheeconomicsliterature,isthatpeoplefollowsocialnormsthatprescribeabehaviorindependentlyofany*WethankColinCamerer,GaryCharness,DouglasDejong,MartinDufwen-berg,ErnstFehr,theeditorEdwardGlaeser,GeorgKirchsteiger,MatthewRabin,RobertRosenthal,ArielRubinstein,twoanonymousreferees,andananonymouseditorforhelpfulcommentsandsuggestions.SpecialthanksgotoEricvanDammeforhiscommentsaswellasforhishelpinraisingthemoneyneededforthe1.Thisargumentrequiresthatchangesincompensationaresmallenoughsothattheincomeeffectsarenegligibleascomparedwiththesubstitutioneffect.Inourexperimentsandintheliteraturewediscuss,thisisalwaysthecase.r2000bythePresidentandFellowsofHarvardCollegeandtheMassachusettsInstituteofTechnology.TheQuarterlyJournalofEconomics,August2000791 monetarycompensation.Donatingbloodmaybeconsideredadutytothecommunitythatoneshouldperformwhenpossible.Amonetarycompensationmaydestroythissenseofdutyandproduceanetdecreaseintheaction.2Adifferentsocialnormthatmaybeunderminedbymonetarycompensationisreciprocity.Supposethatanactionisoriginallyperformedinreturnforapreviousbenet,butthatmoneyispaidforit.Thenthecompensa-tionratherthanthereciprocitywillprobablybetakenasamotivationforthataction.Theincentiveforreciprocityisde-stroyed,andtheactionbecomeslessappealingonitsownmerits.3Aswewillsee,noneoftheseexplanationsseemsadequateforourresults.Theissueoftheeffectofrewardsonbehaviorhasbeendebatedinpsychologythroughoutthepastfourdecades.Behavior-isttheoryhadthesameopinionasstandardeconomics,althoughforcompletelydifferentreasons.Accordingtoinstrumentalcondi-tioning,rewardofferedforanactivitywhichisinitselfneutralorevenmildlyunpleasant,willeventuallyassociateapositivevalencetothatactivity.Sointhelongrunapastrewardhasapositiveeffectontheperformanceofthatactivity.4Thisconclusionofbehavioristpsychologywaschallengedatthebeginningoftheseventiesbythecognitivepsychologyschool.Theyofferedanalternativeview:anactivityhasamotivationofitsown,independentofanyreward,calledintrinsicmotivation.Areward,differentfromthisintrinsicmotivation(inparticular,butnotonly,amonetaryreward)mayreplacetheintrinsicmotiva-tion.5Theneteffectmaybeareductionoftheoverallmotivation,2.Titmuss{1970}claimedthatmonetarycompensationmightunderminethesenseofcivicduty.HeconsidersthespecicexampleofblooddonationinTitmuss{1971},wherehearguesthattheintroductionofmonetarycompensationwillmakethequalityofblooddonatedworse.Arrow{1972}discusseshisthesis:hepredictsthatanincreaseinpricewilleventuallyproduceanincreaseinsupply.Morerecently,theworkofFreyandseveralcoauthors{Frey1994;Frey,Oberholzer-Gee,andEichenberger1996;FreyandOberholzer-Gee1997}haspresentedanddefendedtheideathatpriceincentivesmaycrowdoutmotivation.Kohn{1993a,1993b}hascriticizedincentiveplansbecausetheymakepeoplelessenthusiasticabouttheirwork.3.IntheexperimentsofFehr,Gachter,andKirchsteiger{1996}theintroduc-tionofexplicitincentivesreducedtheperformanceofworkersinarm-workerrelationshipbecausethenormofreciprocitywascompromised.ThispointisdiscussedinFehrandGachter{1998},andmoreextensively,withadditionalevidence,inFehrandRockenbach{2000}.Inhiseldstudyonmanagementbehavior,Bewley{1995,1997}notesthatreal-lifemanagersknowwellthatitisnotwisetodependonnancialincentivesaloneasmotivators.4.AclearexpositionofthispointofviewisinSkinner{1953}.5.Denitionsandmeasurementofintrinsicmotivationarestillcontroversial:butabasicconditionfortheexistence(andempiricalevidence)ofintrinsicmotivationisthattheactivityshouldbeexercisedevenwhenrewardisabsent.QUARTERLYJOURNALOFECONOMICS792 andhenceareductionoftheactivityitself.Wecanformulatethesameideainthelanguage,morefamiliartoeconomists,ofpreferences:iftherewarddirectlyaffectstheutilityofanindi-vidualinanegativeway(becauseitreducestheintrinsicmotiva-tion),thenperformancemaydeclinewiththeincreaseinmone-taryincentive.6Themainconclusionsofthesestudieswerethatpositiverewards,inparticularmonetaryrewards,haveanegativeeffectonintrinsicmotivation.Ifapersonisrewardedforperform-inganinterestingactivity,hisintrinsicmotivationdecreases.Thenegativeeffectissignicantonlyiftherewardiscontingentontheperformance;subjectswhoarepaidaxedpositiveamount,independentoftheirperformance,donotdisplayreductioninintrinsicmotivation.71.TwoExperimentalTestsInthispaperwetestexperimentallytheeffectsofmonetaryincentivesonperformance.Intherstexperimentagroupof160studentsattheUniversityofHaifawereaskedtoanswerasetof50questionstakenfromanIQtest.Thestudentswerepaidaxedamountof60NIS(NewIsraeliShekel8)forparticipatingintheexperiment.Theyweredividedintofourdifferentgroups,corre-spondingtofourdifferenttreatments.Therstgroupwassimplyaskedtoanswerasmanyquestionsastheycould.Tosubjectsinthesecondgroupwepromisedanadditionalpaymentof10centsofaNISpereachquestionthattheyansweredcorrectly.Tosubjectsinthethirdgroupwepromisedanamountof1NIS,andtothoseinthefourthgroupanamountof3NISperquestion.Weobservedthattheaveragenumberofquestionsansweredcor-rectlydeclinedfromslightlymorethan28intherstgroupto23questionsinthesecond.Thenumberincreasedtomorethan34inthethirdgroup,andwasstableat34inthefourthgroup.Aswe ThethesiswassuggestedinDeci{1971},andfurtherdiscussedamongothersinDeci{1975},Deci,Cascio,andKrusell{1973},andKruglansky,Alon,andLewis{1972}.5Aratherlargesetofexperimentsshowedthataloweringindeedoccurred:anearlyoverviewofthisliteratureanditsexperimentalevidenceisinLepperandGreene{1978}.6.Thisisthemodelofmotivationcrowding-out,presentedinFreyandOberholzer-Gee{1997},forinstance.TheirmodelisdiscussedinSectionIVbelow.7.Aconsensusopinioninexperimentalpsychologyisfarfrombeingreached.CameronandPierce{1994}andEisenbergerandCameron{1996}haveprovidedmeta-studiesonthetopicoftheeffectofrewardsonmotivation,evaluatingmorethantwodecadesofstudiesontheissue.Theyalsoprovideausefulreviewoftheliteraturewehavediscussed.Thenalconclusionisstillunclear:forinstance,theyndanegativeeffectoftangiblerewards,andapositiveeffectofverbalrewards.8.Atthetimeoftheexperiment,NIS3.55$1.PAYENOUGHORDONTPAYATALL793 argueinthenextsection,wherethedetailsoftheresultsarepresented,theeffectwasstatisticallysignicant.Oursecondexperimentinvolvedhighschoolchildren,againinIsrael,whoweredoingvolunteerwork.Everyyear,onapredeterminedday,studentsgofromhousetohousecollectingmonetarydonationsthathouseholdsmaketosocietiesforcancerresearch,assistancetodisabledchildren,andsoon.Inourexperiment,wedivided180ofthesestudentsintothreegroups.Therstservedasacontrolgroup:wesimplygaveasmallspeechtothesubjectsrecallingtheimportanceoftheactivitytheyweregoingtoperform.Tothesecondgroup,inadditiontothespeech,wemadeapromisetopay1percentofthetotalamountcollected.Tothethirdwepromisedtopay10percentoftheamountcollected.Inbothcasesitwasmadeclearthatthepaymentwasnancedbyus,andnotbythesocieties.Inthissecondtestweobservedthattheamountcollectedwassmallerinthesecondthanintherstgroup.Theaverageamountforthethirdgroupwashigherthaninthesecondgroup,butstilllowerthanintherst.Again,theresultswerestatisticallysignicant.Sincemonetaryincentives,atlowvalues,wouldappeartohaveadetrimentaleffectonperformance,weinvestigatedwhetherthesubjectswereawareofthis.Inanalsetofexperimentsweaskedsubjectstodecidewhatincentivetheywouldprovidetoothersubjectsworkingontheirbehalf.Inthisexperimentsub-jectsintherstgroupwerepaidaccordingtotheperformanceofthesubjectstowhomtheyweregivingtheincentive.Theycouldchoosebetweenano-rewardandalow-reward.Theincentivetheydecidedtopaywassubtractedfromtheirpayoff.Themajoritychosethelowincentive.Thisincentivewasmorecostly,andaswehaveseenwasinducingaworseperformance,soitisthewrongcontractintheprincipal-agentrelationship.Ourexperimentsfocusonperformance,amatterofcentralinterestforeconomics.Thisvariablealsoprovidesanobjective,quantitativemeasureoftheeffect.Inparticular,westudythedifferentialeffectofsmallandlargerewards.Incontrast,theexperimentalpsychologyliterature,motivatedbythedistinctionbetweenintrinsicandextrinsicmotivation,hasdifferentmea-suresoftheintrinsicmotivationtobethedependentvariable.Themeasurescommonlyusedaretheamountoftimefreelyspentontheactivityandthereportbythesubjectsonthemotivation.9Thereisaseconddifferencebetweenourstudyandthe9.ThesearethetwovariablesthatCameronandPierce{1994}andEisen-bergerandCameron{1996}considerintheirmeta-studies.QUARTERLYJOURNALOFECONOMICS794 experimentsperformedinthepsychologyliterature.Psycholo-gistsstudybehaviormodicationthroughconditioning(inthecaseofthebehavioristschool)orlearning(forthecognitiveschool).Wedonot.Toillustratethedifference,wemayconsidertheclassicexperimentreportedinDeci{1971}.Hehadcollegestudentsplaywithapuzzleinthreesuccessivesessions.Intherstsessionparticipantswerelefttoplayfreely.Inthesecondsessionsubjectsinonegroupreceivedpaymentiftheysolvedthepuzzle,whilethecontrolgroupdidnot.Inathirdsessionthesubjectswereagainlefttoplayfreely.Theamountoftimespentonfreeactivityintherstandthirdsessionwastakenasameasureofintrinsicmotivation.Decifoundthatinthethirdsessiontheexperimentalgroupspentlesstimethanthecontrolgroupplayingwiththepuzzle,andheconcludedthattherewardofferedhaddecreasedtheintrinsicmotivationofsubjectsintherstgroupoverthethreesessions.Westudythebehavioralresponsetodifferentrewardsinasingle-stagesetup.Thecompari-sonisacrossindividuals,notacrosssuccessiveperiodsforthesameindividualfollowingthereward.Finally,wetestboththeeffectsoftheintroductionofreward,andtheeffectsofanincreaseinthereward.Inexperimentaleconomicsthequestionishowmuchclosertothepredictionofeconomicsandgametheorydoesanincreaseinmonetaryrewardsbringthebehaviorofsubjects?Thefocusisonchangesinrewards,alwayskeepingthesepositive.10Webroadenedthistoallowforastart-upeffectandshowedthattheoverallpatterncanbenonmonotonic,thusaccountingforexperimentalevidenceinpsychologythatseemedinconsistentwiththendingsoftheexperimentaleconomicsliterature.II.THEEXPERIMENTS1.TheIQExperiment:DesignTheexperimentwasconductedattheUniversityofHaifa.Thesubjectswere160maleandfemaleundergraduatestudents10.Freyandcoauthorshaveconductedeldstudiesoftheeffectonintrinsicmotivationfromthepointofviewofeconomists.Inparticular,FreyandOberholzer-Gee{1997}studyanswerstoaquestionnaireaskingpeopleabouttheirattitudetowardanuclearwasterepositoryintheirregion.Theirstudyisbasedonstatedbehaviorinhypotheticalchoicesituations,inaninterviewfacetoface.Sincenobodylikestobeconsideredgreedy,theinconsequentialstatementsmightbebiasedbythedesiretoshowoff.Thequestionswereaskedsequentiallyofthesamesubjects.Thedependentvariablewasnotperformance,butwillingnesstoex-changetheinconveniencesofnuclearwasteagainstmoney.Intheirreview,SmithandWalker{1993}ndthatincreasingrewardsbringsthebehaviorclosertothepredictionsofeconomictheory,andreducesthevariancearoundthemean.Inthemorerecentreview,CamererandHogarth{1999}concludethattheevidenceismorecontroversial.PAYENOUGHORDONTPAYATALL795 fromalleldsofstudy,withanaverageageof23.Thesubjectstookpartintheexperimentdividedintofourdifferentgroupsof40studentseach,correspondingtofourdifferenttreatmentsthatwedescribebelow.Atthebeginningoftheexperiment,eachstudentwasprom-isedaxedpaymentofNIS60forparticipation.Theywerethentoldthattheexperimentwouldtake45minutes,andtheywouldbeaskedtoansweraquizconsistingof50problemstakenoutofapsychometrictestusedtoscanapplicantstotheuniversity.ThistestissimilartotheGMATexam:theparticipantsweretoldthatthiswasasortofIQtest.Theproblemsinthequizwerechosentomaketheprobabilityofacorrectanswerdependmostlyoneffort.Inparticular,emphasiswasplacedonquestionsinvolvingreason-ingandcomputationratherthangeneralknowledge.Inthefourdifferenttreatmentssubjectswerepromiseddifferentadditionalpaymentsforeachcorrectanswer.Intherstgroupnomentionwasmadeofanyadditionalpayment.Inthesecondgroupsubjectswerepromisedanadditionalpaymentof10centsofaNISperquestionansweredcorrectly.Theamountpromisedwasofstep1NISand3NIS,respectively,forthethirdandfourthgroup.Aftertheintroduction,thequizwasdistributed.Participantswerenotallowedanymaterialontheirtablesexceptthequizitself,andweretoldthatonlythosewhostayeduntiltheendoftheexperimentwouldbepaid.Noclarifyingquestionsbystudentswereallowedduringthistime.Attheendoftheexperimentparticipantsweretoldwhereandwhentogotocollecttheirearnings.TheinstructionsarepresentedinAppendix1.2.TheIQExperiment:ResultsAppendix2reportsthenumberofcorrectanswersforeachsubject.SummarystatisticsarepresentedinTableI.Theaveragenumberofcorrectanswerswas28.4outof50questionsintherstgroup.Theaveragewas23.07inthesecondgroup,wheresubjectsweregettinganadditional10centspercorrectanswer.Theaveragewasthenhigher,evencomparedwiththerstgroup,andequalto34.7inthethirdgroup(oneNIS),and34.1inthefourthgroup(threeNIS).AnonparametricMann-WhitneyUtestbasedonrankscanbeusedtoinvestigatewhetherthesampleofcorrectanswerscamefrompopulationswiththesamedistribution.InTableIIwereporttheresultsofapairwisecomparisonofthedifferenttreatments.AQUARTERLYJOURNALOFECONOMICS796 numberintheintersectionofrowandacolumnindicates,forthecorrespondingpairoftreatments,theprobabilityofgettingatleastasextremeabsolutevaluesoftheteststatisticasweobserve,giventhatthetwosamplescomefromthesamedistribution.Thedifferencebetweenthedistributionsinthezeropaymentandinthelowpaymentissignicant,ata.9levelofsignicance.Thedifferencebetweenthedistributionsinthehighpayofftreatments(1NISand3NIS)isnotsignicant.Finally,thedistributionsintheselattertreatmentsaresignicantlyhigherthanthedistributionsinthecaseofthezeroand10centsmarginalpayoffs.Forinstance,thep-valuesforthecomparisonbetweenthe1NIStreatmentandthezeroand10centspaymentare.0687and.0004,respectively.Thedifferenceamongtreatmentspersistsifwecomparesubgroupswithsimilarperformance.Forinstance,werankedtheTABLEISUMMARYSTATISTICSFORTHEIQEXPERIMENT,FORTHEDIFFERENTTREATMENTSTheLowerFractionistheFractionofSubjectsWhoGaveaNumberofCorrectAnswersLessthan16 Nopayment10centsNIS1NIS3Average28.423.0734.734.1Standarddeviation13.9214.728.889.42Median31263737Averagetop203934.942.3541.6Standarddev.top205.256.793.634.18Averagebottom2017.811.2527.0526.6Standarddev.top2011.5610.225.076.8220thquantile4035444380thquantile2002625Lowerfraction15%27.5%0%0% TABLEIIMANN-WHITNEYUTESTSBASEDONRANKSWITHPAIRWISECOMPARISONSOFMEDIANSOFCORRECTANSWERSBYTREATMENT Nopayment10centsNIS110cents.0875NIS1.0687.0004NIS3.0708.0006.6964* (Prob.. z ,wherezistheteststatistic).Anasteriskindicatesthatforthatcomparisonwecannotreject(ata.9levelofsignicance)thehypothesisthatthetwosamplescomefromthesamedistribution.PAYENOUGHORDONTPAYATALL797 tophalfandthebottomhalfoftheparticipantsaccordingtoperformance,andwethentestedthesignicanceofthedifferencebetweendistributions.TheresultsarepresentedinTablesIIIaandIIIb.Asimilarcomparisoncanbemadebetweenthedistributionofthetoptenparticipants.Thedifferencebetweenthe1NISand3NISisclearlynotsignicant.Thedifferencebetweenthe10centsand1NISaswellas3NISissignicant.Thediversityinindividualperformancemaybeduetodifferencesinseveraldifferentfactors,suchasskill,generalknowledge,andpreferencesformoneyandeffort.Ourresultsseemtoindicatethattheeffectoftheintroductionofmonetaryincentivesandtheirchangeaffectinthesamewayindividualswithdifferentcharacteristics,ashighertalent,orhigherwilling-nesstoputouteffort.4.TheDonationExperiment:DesignToillustratethenextstudyapremiseisnecessary.InIsraelafewdonationdaystakeplaceeveryyear.Eachofthesedaysisdevotedtoasocietythatcollectsdonationsfromthepublicforsomepurpose,suchascancerresearch,disabledchildren,etc.High-schoolstudentsgofromdoortodoortocollectthedonations.TABLEIIIaMANN-WHITNEYUTESTSBASEDONRANKSWITHPAIRWISECOMPARISONSOFMEDIANSOFCORRECTANSWERSBYTREATMENT,USINGTHEBEST20OBSERVATIONSOFEACHTREATMENT Nopayment10centsNIS110cents.0381NIS1.0146.0003NIS3.0339.0008.4222* TABLEIIIbMANN-WHITNEYUTESTSBASEDONRANKSWITHPAIRWISECOMPARISONSOFMEDIANSOFCORRECTANSWERSBYTREATMENT,USINGTHE20WORSTOBSERVATIONSOFEACHTREATMENT Nopayment10centsNIS110cents.0299NIS1.0120.0000NIS3.0270.0001.7552* QUARTERLYJOURNALOFECONOMICS798 Normally,thestudentsareorganizedintogroupsaccordingtotheclassinwhichtheystudy,andeachgroupisthendividedintopairsofstudentswhoworktogetherasateam.Eachpairreceivesacertainnumberofcoupons,whichserveasreceiptsforthedonors.Theamountcollectedbyeachpaironthedonationdaydependsmostlyontheeffortinvested:themorehousestheyvisit,themoremoneytheycollect.Thisisespeciallytruebecausethestudentsdonothavetosellthedonation,sincemostpeoplearealreadyfamiliarwithitfromtelevisionannouncementsandWehad180high-schoolstudentsaroundtheageof16participatingwiththreetreatmentlevels.Thereweretwogroupsofparticipants,eachwithfteencouples,foreachtreatment.EachpairreceivedcouponsamountingtoNIS500altogether.Inthediscussionthatfollowswereportjointlytheresultsforthetwogroupsateachtreatmentlevel.Inthersttreatmentanexperimenterappearedbeforeeachofthegroupsandtoldthemabouttheimportanceofthedonationtheyweretocollect,andthatthesocietywishedtomotivatethemtocollectasmuchmoneyaspossible.Theyweretoldthattheresultsofthecollectionwouldbepublished,sothattheamountcollectedbyeachpairwouldbecomepublicknowledge.Thesecondtreatmentwasconductedsimilarly:butafterthesamespeech,eachpairwaspromised1percentoftheamountthatthetwoofthemcollected.Finally,inthethirdtreatmenteachpairwaspromised10percentoftheamounttheycollected.Inthesecondandthirdtreatmentsitwasmadeclearthatthepaymentwasmadefromfundsadditionaltothedonation,pro-videdbyus,andthatthesocietieswouldreceivethetotalamountofthedonationasusual.Theactivityofcollectingdonationsthenwentonasusual,accordingtotheproceduredescribedabove.5.TheDonationExperiment:ResultsThepreciseamountcollectedbyeachgroupforthethreedifferenttreatmentsisreportedinAppendix3.WereportthemostimportantsummarystatisticsinTableIV.Theaverageamountcollectedwas238.67over500forgroupsinthersttreatment(withnopayment).Theaveragefellto153.67inthesecondgroup.Itwas219.33,higherthaninthesecondtreatment(butlowerthantherst)inthethirdtreatment.Totestthesignicanceoftheseresults,weusethenonpara-metricMann-WhitneyUtestbasedonrankstoinvestigatePAYENOUGHORDONTPAYATALL799 whethertheamountsofmoneydonatedcamefromthesamedistribution.TheresultsofthetestarereportedinTableV.Thedifferencebetweentheaveragecollectionintherstandinthesecondgroupissignicant,ata.9levelofsignicance.Whenthepayoffincreasedto10percentoftheamountcollected,theaveragecollectionwas219.33.Theamountscollectedinthistreatmentweresignicantlyhigherthantheamountscollectedinthe1percenttreatment,butnotsignicantlyhigherthantheamountscollectedwhennopayoffwasgiven.Wecomparedthetoptencollectionsineachtreatment.Thedifferencebetweentheamountscollectedinthe1percenttreat-mentandtheamountscollectedintheothertwotreatmentswassignicant.AsintheIQexperiment,thisresultindicatesthatthedifferencebetweentreatmentsisuniformamongsubjectswithhighandthosewithlowperformance.III.HOWSUBJECTSPERCEIVETHEEFFECTSOFMONETARYINCENTIVESTheevidencewehavepresentedseemstoindicatethattheeffectofmonetaryincentivescanbe,forsmallamounts,detrimen-TABLEIVSUMMARYSTATISTICSFORTHEDONATIONEXPERIMENT,FORTHEDIFFERENTTREATMENTS Nopayment1percent10percentAverage238.6153.6219.3Standarddeviation165.77143.15158.09Median200150180Averagetop20375.33272348Standarddeviationtop20111.9298.64110.46Averagebottom2010235.3390.66Standarddeviationbottom2066.1352.0863.9720thquantile10005080thquantile450250400 TABLEVMANN-WHITNEYUTESTSBASEDONRANKSWITHPAIRWISECOMPARISONSOFMEDIANSOFAMOUNTSOFMONEYCOLLECTEDBYTREATMENT Nopayment1percent1percent.097710percent.7054*.0515 QUARTERLYJOURNALOFECONOMICS800 taltoperformance.Sinceincentivesareusuallydesignedtoaffectperformanceinanoptimalway,itisinterestingtoinvestigatewhetherthiseffectisanticipated.Toaddressthisquestion,weconductedatestbasedonboththeIQanddonationexperiments.Inbothcasessubjectswerepromisedapaymentproportionaltotheperformanceofadifferentperson(theiragent),andtheyhadtochoosetheincentiveschemefortheagent.1.TheIQExperimentwithPrincipalandAgentsThesubjectsintheexperimentwere53studentsintheroleofprincipals.Theyweretoldthattheywouldbematchedwithanotherplayer.Theyweregivenashortintroductioninwhichtheyreceivedanexplanationofthetaskthattheiragentswouldperform,namely,answeringquestionsfromtheadmissiontestthatthesubjectstookintheIQexperiment.Theywerethentoldthateachoneofthemwouldbepaid1NISforeverycorrectanswergivenbyhisagent.Theprincipalshadtochoosewhetherapaymentof10centsofNISorazeropaymentwastobemadetotheiragentforeverycorrectanswer.Thispaymentwouldbepaidoutoftheamountof1NISpaidtotheprincipal.Theprincipalsweretoldthattheagentwouldknowinadvancehowmuchhewasgoingtobepaidforeverycorrectanswer,butthathewouldnotknowthattheprincipalhadtodeciderstwhethertopayhimnothingor10cents.Hewouldnotevenknowthataprincipalexisted.Thiswastheonlydecisiontheprincipalshadtomake.Attheendoftheexperimentparticipantsweretoldwhereandwhentogotocollecttheirearnings.Outofthe53subjects46subjects,aproportionof87percent,chosetopay10centsforeverycorrectansweroftheagent.Withthischoicetheyreducedtheirincomeintwoways:byprovidingapaymenttotheagent,andbyreducingtheperformanceoftheagentbecauseofthenegativeeffectoflowrewards.2.TheDonationExperimentwithPrincipalandAgentsInthedonationexperimentwealsohadagroupofstudentswhoplayedtheroleofprincipals.Theyweretoldthattheywouldbematchedrandomlywithonepairwhohadalreadycollectedmoney,andwouldbepaid5percentofwhatthispairhadcollected.TheprincipalshadtodecidewhethertheywantedustochoosethepairfromthegroupthatdidnotreceiveanypayofforPAYENOUGHORDONTPAYATALL801 fromthegroupthatreceived1percentofwhattheyhavecollected.Thepaymenttotheagentwasmadeoutofthe5percent.Theresultsconrmedwhatweobservedintheprevioustest.Outofthe25participants,19(thatis,aproportionof76percent)preferredtobematchedwithanagentwhowaspaid1percentoftheamounthecollected.IV.INTERPRETATIONOFTHERESULTS1.SummaryoftheResultsThefollowingfactsseemtobeclearfromtheanalysisoftheresults.Ifwecomparethetreatmentinwhichmonetarycompen-sationwasnotevenmentionedwiththeoneinwhichitwas,thenwemayconcludethatthemonetarycompensationproducesareductionintheperformance.Butinthesetoftreatmentsinwhichamonetarycompensationisoffered,ahighermonetaryincentiveproducedahigherperformance.Thisresultindicatesadiscontinuityatthezeropaymentoftheeffectofmonetaryincentive:forallpositivebutsmallenoughcompensations,thereisareductioninperformanceascomparedwiththezerocompen-sation,or,better,withthelackofanymentionofcompensation.Also,subjectsinthesamepopulationasthosewhoexhibitthisbehaviordonothaveaclearorstrongperceptionofthisdisconti-nuity.Theyseemtoindiscriminatelyapplytherule,whichisvalidintheregionofpositivecompensations,thathigherpaymentprovideshigherperformance.2.IntrinsicandExtrinsicMotivationArstinterpretationoftheseresultsispossiblealongthelinesprovidedbycognitivepsychologists:theactivityhasanintrinsicmotivation,andtheintroductionofamonetaryreward,whichisanextrinsicmotivation,displacestherst,andtheneteffectmaybeareductionintheactivity.Wehavetoseewhetherthisexplanationisjustiedinthecaseofourexperiments.Arstversionoftheinterpretationisthatthesubjectisweightingintrinsicandextrinsicmotivation,andtheintrinsicmotivationisreduceddirectlybythemonetarycompensation.AmodelpresentingthisversionformallyisprovidedinFreyandOberholzer-Gee{1997}.Inthismodeltheagenthasautilityfunctionoftheactivityaandthemonetaryrewardr.Thefunctionhasoneterm,u(a,r),withthestandardfeatures,addedtoasecondQUARTERLYJOURNALOFECONOMICS802 termdescribingtheintrinsicmotivation,m(a,r).Thislattertermcapturesthenegativeeffectofmonetaryrewardonintrinsicmotivation,becausethederivativeofmwithrespecttorisnegative.Theoptimallevelofactivityasafunctionoftherewardristhencomputedintheusualway.Comparativestaticanalysisshowsthattheoptimalactivitymaybedecreasinginr.Thismodelisinsightful,andhasthevirtueofreducingthediscussiontoaspecialcaseofstandardeconomicanalysis.How-ever,itseemsunabletoexplainthediscontinuity:asmallchangefromzerotoaverylowpaymentshouldreduce(iftheutilityfunctionhascurvature)asmallchangeintheactivity.Asecondversionisbasedonacognitiveexplanationofthedisplacement,basedonattributiontheoryalongthelinesrstsuggestedinFestinger{1957}andHeider{1958}.ThisexplanationofthedisplacementispresentedinBem{1965,1967}andKelley{1967,1971}.Forinstance,Bemsuggeststhatpeopleinterprettheiractionsasanyoutsiderdoes,bylookingatthereasonsandmotivesforwhattheydo.Ifasubjectobserveshimselfdoinganactionwhennoexogenouscompensationisprovided,thenheinterpretshismotiveasanintrinsicmotivation.Ifamonetarycompensationisprovided,thenthesamesubjectwillinterprethismotiveasbeingthemonetaryreward.Inthisversionoftheinterpretationthediscontinuityisexplained:theintroductionofsmallcompensationhastheeffectofchangingtheperception,andthischangeislarge,independentoftheamount.Butthisexplanationisonlyappropriateinsequentialexperiments,whereasubjecthastheopportunityofobservinghimselfactingforsomeincentive,modifyhisself-perception,andthenchangehisbehavior.Itislessappropriateinoursingle-stagesetup.Thenextinterpretationseemstousthemostconvincing.3.IncompleteContractsThecontractdescribingtheexperimentisanincompletecontract.Allsuccessiveinstructionsgivenbytheexperimenterprovidepartialcompletionofitsterms.Whennomonetarycompensationforthecorrectanswersisprovided,thecontractisprobablyinterpretedasApaymentof60NISisprovidedforparticipationintheexperiment,andInowknowthatthisparticipationconsistsofansweringthequestions.Some(butnotall)ofthesubjectsfeltthatitwastheirsideofthebargaintoanswerthosequestions.PAYENOUGHORDONTPAYATALL803 Theintroductionofadditionalcompensationforcorrectan-swerschangestheperceptionofthecontract:SixtyNISwerepaidforshowingup.Theactivityofansweringthequestionsisnowpaidbyrate.Thisrateisnowthereferencepointtodecidetheappropriateintensityoftheactivity.Whentherateislow(10cents),theactivityislow:thereisnonecessaryconnectionwiththelevelofactivityprovidedinthatdifferentsituation,whereansweringquestionsisdue.Animportantpredictiongivenbyourexplanation(butalsobythesecondversionofthepreviousinterpretation)isthatthechangeinperception,oncerealized,ishardtoreverse.Thisisindeedthecaseinarelatedeldstudy{GneezyandRustichini2000}thatweconductedontheeffectofpenalties.Thestudywasconductedinagroupofday-carecenters,whereparentswerecominglaterthantheduetimetocollecttheirchildren.Inthetestgroupweintroducedatthefourthweekofthestudyaneforlatearrival.Thenewas10NISforadelayoftenminutesormore.Thenewascancelledattheseventeenthweek.Theeffectwasanincreaseinthenumberoflatearrivalsaftertheintroductionofthene.InFigureIwereporttheaveragedelaysforthecontrolandthetestgroup,inthetwenty-weekperiod.Thisresultisconsistentwithashiftinperceptionofanincompletecontract,asintheinterpretationwehavejustpro-vided.Furthersupportforthisexplanationcomesfromthebehaviorofparentsaftertheseventeenthweek:thenumberofFIGUREIAverageNumberofLate-ArrivingParentsEachWeek,byGroupTypeQUARTERLYJOURNALOFECONOMICS804 latearrivalsstayedconstant,asonewouldexpectaftertheperceptionofthecontracthaschanged.AninterestingextensionoftheIQexperimentdesignedtotestthistheorywouldbetotaketheparticipantsoftheIQquizexperiment,where10centshasbeenofferedpereachquestionansweredcorrectly,andinasecondexperimentaskthemtoperformthesametask,fornocompensation.Weconjecturethattheperformancewillbeworsethantheoneofsubjectswhohavebeenofferedzerocompensationfromthestart,andofcourseworsethantheperformanceofthesameparticipantsintherst4.HowSmallIsaSmallAmount?Inourexperimentsthesubjectswhowerepaid10centsfor1NISforeachrightanswergaveaworseperformancethandidthosewhowerenotgivenanypayment.Tencentsmaysoundlikeverysmallcompensation,almostinsultingandthereforethepracticalimplicationsofourndingsminimal;buttwoqualica-tionsarenecessary.First,notallsmallcompensationsmaybeconsideredinsulting.Forexample,considerthepracticeofpayingbackasmallamountforrecyclingasoftdrinkbottle,whichiscommoninmanyEuropeancountries.Anecdotalevidencesug-geststhatpeoplearelesswillingtorecyclewhenthissmallcompensationisoffered,thantheyareinplaceswherenomoneyisoffered,andfailuretorecycleissimplyconsideredbadbehavior.Itisunlikelythattheamountofferedisconsideredinsulting.Adifferentexplanationinthiscasemightbethatpeopleareafraidoflookingcheapformakingtheeffortofrecyclingtocollectthesmallamount.Second,insultingcompensationsarenotnecessarilysmallcompensations.Thereasonisthattheamountofmoneyofferedchangestheperceptionthatpeoplehaveofwhatthecontractisabout.Inparticular,itmaynotbesafetoassumethataddinganincentiveleavestheutilityoftheotherincentivesunchanged.Acertainamountofmonetarycompensationmaybeperceivedastoosmallwhencomparedwiththeotherrelevantfactors,evenifitisnottoosmallinitself.Wemaythinkofreal-lifesituationswhereanontrivialamountofmoneymaysounddisproportionatelysmallcomparedwithotherfactors.Forinstance,anincreaseinsalaryby$200permonthtoaprofessor,ascompensationforasmallerPAYENOUGHORDONTPAYATALL805 office,maybeworsethannocompensation.Similarly,smallhonorariaforseminarspeakersmaybecounterproductive.11Thisfactorislikelytobemoreimportantwhenfactorslikehealthorreputationareatstake.Sowhileinourexperimentsitisclearthattoosmallissomewherebetween10centsand1NIS,theexactdeterminationofthisquantityinexperimentalorreal-lifesituationsislikelytobedifficultandsubtle.Ourtheoryhasaninterestingimplicationforexperimentaleconomics.Itseemswidelyacceptednowthatasufficientlyhighrewardissufficienttoreducethevarianceoftheobservedbehavioraroundthemeanvalueofthebehavioraspredictedbythetheory.Theseeminglynaturalimplicationthatasmallrewardsimplyproduceshighervariancemightbefalse:atthelowendofthescaleofrewards,theremightbeparadoxicalbehavior,ofthetypeobservedinourexperiments.Infact,thebehaviorwithsmallpaymentmaybe,asitisinourexperiments,moredistantfromthepredictionthanthebehaviorwithzeroproportionalpayment.Thismaybeimportantincaseswherelargepaymentsareimpossible,forexample,becauseofethicalorlegalreasons.Therulethatasmallpaymentisbetterthannothingmightbeabadrule.125.TheTwoExperimentsThereisofcourseanimportantdifferencebetweenthetwoexperiments.Inthedonationstudythereisanintrinsicmotiva-tionthatisclearlyidentiable:thealtruisticreasonthatis,afterall,themotivationforthestudentsbeforetheybecamesubjectsinourexperiment.Thisdifference,forinstance,mayexplainasignicantdifferenceinbehaviorbetweenthetwostudies.IntheIQtesttheperformancewithasubstantialpayment(1NIS)reachesalevelwellabovetheoneinthetreatmentwithzeropayment(34.7correctanswersagainst28.4).Inthedonationstudy,evenapaymentof25NISperpersondoesnotbringtheperformancebacktothelevelachievedinthezeropaymentgroup(219.3NISagainst238.67).Ofcourseanevenlargerpaymentmightbeenough.Sotheissueofasystematicdifferenceinbehaviorinthetwoenvironmentsseemsinteresting,andthepointisworthfurtherstudy.11.Wethankananonymouseditorforsuggestingthispoint.12.AsimilarpointisarguedinthereviewbyCamererandHogarth{1999}.QUARTERLYJOURNALOFECONOMICS806 V.CONCLUSIONSInthispaperwehaveprovidedquantitativelypreciseevi-dence,inacontrolledenvironment,oftheeffectoftheintroductionofmonetarycompensationonperformance,whichincludesaprecisecomparisonofthecasesinwhichtherewardwasgivenindifferentquantitiesornotgivenatall.Theresulthasbeenthattheusualpredictionofhigherperformancewithhighercompensa-tion,whenoneisoffered,hasbeenconrmed:buttheperformancemaybelowerbecauseoftheintroductionofthecompensation.Onthebasisofthispreciseevidencewemaybeginthesearchforasatisfactoryexplanation.Furtherresearch,intheoryandexperiments,isnecessary,andwehaveindicatedsomeofthepromisingdirections.Inthemeantime,themostconvincingexplanationseemstoustobebasedoncognitivearguments:contracts,socialorprivate,areusuallyincomplete,andregulateaninteractioninasituationofincompleteinformation.Theintroductionofarewardmodiessomeofthetermsofthecontract,butalsoprovidesinformation.Thenewbehaviorpro-ducedbythecontractisaresponsetothecombinationofanewpayoffstructureandthenewinformation.ThedifficultyisthatthestandardBayesianupdatingofinformationseemsunsuitedforthissituation.APPENDIX1:INSTRUCTIONSFORTHEIQEXPERIMENTITheinstructionsaresimple,andifyoufollowthemcarefullyyoumayearnaconsiderableamountofmoney.Theexperimentwilltakeabout45minutes.Intheexperimentyouareaskedtoansweraquizof50problemstakenfromapsychometrictestusedtoscanapplicantstotheuniversity.ItisasortofIQtest.YouwillbepaidNIS60forshowinguptotheexperiment. Thefollowingsentencewasnotincludedintreatment1:Inaddition,youwillbepaidNIS0.1(intreatment2,NIS1intreatment3,NIS3intreatment4)foreverycorrectansweryougive. Themoneywillbepaidtoyou,privatelyandincash,attheendoftheexperiment.Doyouhaveanyquestions?PAYENOUGHORDONTPAYATALL807 APPENDIX2:THENUMBEROFCORRECTANSWERSGIVENINTHEIQEXPERIMENTBYPARTICIPANTSACCORDINGTOTREATMENTS Obs.#NopaymentObs.#10centsObs#NIS1Obs.#NIS314941508149121502484244824712250348434483471234744544438446124455424540854612544642463986451264474247368744127448404835884412843937493589441294210375035904313041113751349141131411237523492411323913365332934113339143654329440134391536553195401353816355630963813638173457269738137371834582698381383719345926993813937203160261003714037213161241013414137223162231023314236233163231033314336242964221043314434252965211053114533262466211063114631272367211073014731282368191082914831292369191092914928302270131102915027312271111112815126322072811228152253320730113261532534187401142315421357750115221552036376011622156203707701172215719380780118211581939079011920159174008001201716016 QUARTERLYJOURNALOFECONOMICS808 TECHNION,HAIFA,ISRAELBOSTONUNIVERSITYREFERENCESArrow,K.J.,GiftsandExchanges,PhilosophyandPublicAffairs,I(1972),343362.Bem,D.J.,AnExperimentalAnalysisofSelf-Persuasion,JournalofExperimen-talandSocialPsychology,I(1965),199218. ,Self-Perception:AnAlternativeInterpretationofCognitiveDissonancePhenomena, PsychologicalReview, LXXIV(1967),183200. 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