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

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

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


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 ID: 2501 Download Pdf

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PAYENOUGHORDON’TPAYATALL*URIGNEEZYANDALDORUSTICHINIEconomistsusuallyassumethatmonetaryincentivesimproveperformance,andpsychologistsclaimthattheoppositemayhappen.Wepresentanddiscussasetofexperimentsdesignedtotestthesecontrastingclaims.Wefoundthattheeffectofmonetarycompensationonperformancewasnotmonotonic.Inthetreatmentsinwhichmoneywasoffered,alargeramountyieldedahigherperformance.However,offeringmoneydidnotalwaysproduceanimprovement:subjectswhowereofferedmonetaryincentivesperformedmorepoorlythanthosewhowereofferednocompensation.Severalpossibleinterpreta-tionsoftheresultsarediscussed.I.IAccordingtostandardeconomicreasoning,anincreaseintheŽnancialincentivesprovidedforanactivitywillimproveperfor-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.SupposethatanactionisoriginallyperformedinreturnforapreviousbeneŽt,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.HeconsidersthespeciŽcexampleofblooddonationinTitmuss{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-tionofexplicitincentivesreducedtheperformanceofworkersinaŽrm-workerrelationshipbecausethenormofreciprocitywascompromised.ThispointisdiscussedinFehrandGachter{1998},andmoreextensively,withadditionalevidence,inFehrandRockenbach{2000}.InhisŽeldstudyonmanagementbehavior,Bewley{1995,1997}notesthatreal-lifemanagersknowwellthatitisnotwisetodependonŽnancialincentivesaloneasmotivators.4.AclearexpositionofthispointofviewisinSkinner{1953}.5.DeŽnitionsandmeasurementofintrinsicmotivationarestillcontroversial:butabasicconditionfortheexistence(andempiricalevidence)ofintrinsicmotivationisthattheactivityshouldbeexercisedevenwhenrewardisabsent.QUARTERLYJOURNALOFECONOMICS792 andhenceareductionoftheactivityitself.Wecanformulatethesameideainthelanguage,morefamiliartoeconomists,ofpreferences:iftherewarddirectlyaffectstheutilityofanindi-vidualinanegativeway(becauseitreducestheintrinsicmotiva-tion),thenperformancemaydeclinewiththeincreaseinmone-taryincentive.6Themainconclusionsofthesestudieswerethatpositiverewards,inparticularmonetaryrewards,haveanegativeeffectonintrinsicmotivation.Ifapersonisrewardedforperform-inganinterestingactivity,hisintrinsicmotivationdecreases.ThenegativeeffectissigniŽcantonlyiftherewardiscontingentontheperformance;subjectswhoarepaidaŽxedpositiveamount,independentoftheirperformance,donotdisplayreductioninintrinsicmotivation.71.TwoExperimentalTestsInthispaperwetestexperimentallytheeffectsofmonetaryincentivesonperformance.IntheŽrstexperimentagroupof160studentsattheUniversityofHaifawereaskedtoanswerasetof50questionstakenfromanIQtest.ThestudentswerepaidaŽxedamountof60NIS(NewIsraeliShekel8)forparticipatingintheexperiment.Theyweredividedintofourdifferentgroups,corre-spondingtofourdifferenttreatments.TheŽrstgroupwassimplyaskedtoanswerasmanyquestionsastheycould.Tosubjectsinthesecondgroupwepromisedanadditionalpaymentof10centsofaNISpereachquestionthattheyansweredcorrectly.Tosubjectsinthethirdgroupwepromisedanamountof1NIS,andtothoseinthefourthgroupanamountof3NISperquestion.Weobservedthattheaveragenumberofquestionsansweredcor-rectlydeclinedfromslightlymorethan28intheŽrstgroupto23questionsinthesecond.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.TheŽnalconclusionisstillunclear:forinstance,theyŽndanegativeeffectoftangiblerewards,andapositiveeffectofverbalrewards.8.Atthetimeoftheexperiment,NIS3.55$1.PAYENOUGHORDON’TPAYATALL793 argueinthenextsection,wherethedetailsoftheresultsarepresented,theeffectwasstatisticallysigniŽcant.Oursecondexperimentinvolvedhighschoolchildren,againinIsrael,whoweredoingvolunteerwork.Everyyear,onapredeterminedday,studentsgofromhousetohousecollectingmonetarydonationsthathouseholdsmaketosocietiesforcancerresearch,assistancetodisabledchildren,andsoon.Inourexperiment,wedivided180ofthesestudentsintothreegroups.TheŽrstservedasacontrolgroup:wesimplygaveasmallspeechtothesubjectsrecallingtheimportanceoftheactivitytheyweregoingtoperform.Tothesecondgroup,inadditiontothespeech,wemadeapromisetopay1percentofthetotalamountcollected.Tothethirdwepromisedtopay10percentoftheamountcollected.InbothcasesitwasmadeclearthatthepaymentwasŽnancedbyus,andnotbythesocieties.InthissecondtestweobservedthattheamountcollectedwassmallerinthesecondthanintheŽrstgroup.Theaverageamountforthethirdgroupwashigherthaninthesecondgroup,butstilllowerthanintheŽrst.Again,theresultswerestatisticallysigniŽcant.Sincemonetaryincentives,atlowvalues,wouldappeartohaveadetrimentaleffectonperformance,weinvestigatedwhetherthesubjectswereawareofthis.InaŽnalsetofexperimentsweaskedsubjectstodecidewhatincentivetheywouldprovidetoothersubjectsworkingontheirbehalf.Inthisexperimentsub-jectsintheŽrstgroupwerepaidaccordingtotheperformanceofthesubjectstowhomtheyweregivingtheincentive.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-gistsstudybehaviormodiŽcationthroughconditioning(inthecaseofthebehavioristschool)orlearning(forthecognitiveschool).Wedonot.Toillustratethedifference,wemayconsidertheclassicexperimentreportedinDeci{1971}.Hehadcollegestudentsplaywithapuzzleinthreesuccessivesessions.IntheŽrstsessionparticipantswerelefttoplayfreely.Inthesecondsessionsubjectsinonegroupreceivedpaymentiftheysolvedthepuzzle,whilethecontrolgroupdidnot.Inathirdsessionthesubjectswereagainlefttoplayfreely.TheamountoftimespentonfreeactivityintheŽrstandthirdsessionwastakenasameasureofintrinsicmotivation.Decifoundthatinthethirdsessiontheexperimentalgroupspentlesstimethanthecontrolgroupplayingwiththepuzzle,andheconcludedthattherewardofferedhaddecreasedtheintrinsicmotivationofsubjectsintheŽrstgroupoverthethreesessions.Westudythebehavioralresponsetodifferentrewardsinasingle-stagesetup.Thecompari-sonisacrossindividuals,notacrosssuccessiveperiodsforthesameindividualfollowingthereward.Finally,wetestboththeeffectsoftheintroductionofreward,andtheeffectsofanincreaseinthereward.Inexperimentaleconomicsthequestionis‘‘howmuchclosertothepredictionofeconomicsandgametheorydoesanincreaseinmonetaryrewardsbringthebehaviorofsubjects?’’Thefocusisonchangesinrewards,alwayskeepingthesepositive.10Webroadenedthistoallowforastart-upeffectandshowedthattheoverallpatterncanbenonmonotonic,thusaccountingforexperimentalevidenceinpsychologythatseemedinconsistentwiththeŽndingsoftheexperimentaleconomicsliterature.II.THEEXPERIMENTS1.TheIQExperiment:DesignTheexperimentwasconductedattheUniversityofHaifa.Thesubjectswere160maleandfemaleundergraduatestudents10.FreyandcoauthorshaveconductedŽeldstudiesoftheeffectonintrinsicmotivationfromthepointofviewofeconomists.Inparticular,FreyandOberholzer-Gee{1997}studyanswerstoaquestionnaireaskingpeopleabouttheirattitudetowardanuclearwasterepositoryintheirregion.Theirstudyisbasedonstatedbehaviorinhypotheticalchoicesituations,inaninterviewfacetoface.Sincenobodylikestobeconsideredgreedy,theinconsequentialstatementsmightbebiasedbythedesiretoshowoff.Thequestionswereaskedsequentiallyofthesamesubjects.Thedependentvariablewasnotperformance,butwillingnesstoex-changetheinconveniencesofnuclearwasteagainstmoney.Intheirreview,SmithandWalker{1993}Žndthatincreasingrewardsbringsthebehaviorclosertothepredictionsofeconomictheory,andreducesthevariancearoundthemean.Inthemorerecentreview,CamererandHogarth{1999}concludethattheevidenceismorecontroversial.PAYENOUGHORDON’TPAYATALL795 fromallŽeldsofstudy,withanaverageageof23.Thesubjectstookpartintheexperimentdividedintofourdifferentgroupsof40studentseach,correspondingtofourdifferenttreatmentsthatwedescribebelow.Atthebeginningoftheexperiment,eachstudentwasprom-isedaŽxedpaymentofNIS60forparticipation.Theywerethentoldthattheexperimentwouldtake45minutes,andtheywouldbeaskedtoansweraquizconsistingof50problemstakenoutofapsychometrictestusedtoscanapplicantstotheuniversity.ThistestissimilartotheGMATexam:theparticipantsweretoldthatthiswasasortofIQtest.Theproblemsinthequizwerechosentomaketheprobabilityofacorrectanswerdependmostlyoneffort.Inparticular,emphasiswasplacedonquestionsinvolvingreason-ingandcomputationratherthangeneralknowledge.Inthefourdifferenttreatmentssubjectswerepromiseddifferentadditionalpaymentsforeachcorrectanswer.IntheŽrstgroupnomentionwasmadeofanyadditionalpayment.Inthesecondgroupsubjectswerepromisedanadditionalpaymentof10centsofaNISperquestionansweredcorrectly.Theamountpromisedwasofstep1NISand3NIS,respectively,forthethirdandfourthgroup.Aftertheintroduction,thequizwasdistributed.Participantswerenotallowedanymaterialontheirtablesexceptthequizitself,andweretoldthatonlythosewhostayeduntiltheendoftheexperimentwouldbepaid.Noclarifyingquestionsbystudentswereallowedduringthistime.Attheendoftheexperimentparticipantsweretoldwhereandwhentogotocollecttheirearnings.TheinstructionsarepresentedinAppendix1.2.TheIQExperiment:ResultsAppendix2reportsthenumberofcorrectanswersforeachsubject.SummarystatisticsarepresentedinTableI.Theaveragenumberofcorrectanswerswas28.4outof50questionsintheŽrstgroup.Theaveragewas23.07inthesecondgroup,wheresubjectsweregettinganadditional10centspercorrectanswer.Theaveragewasthenhigher,evencomparedwiththeŽrstgroup,andequalto34.7inthethirdgroup(oneNIS),and34.1inthefourthgroup(threeNIS).AnonparametricMann-WhitneyUtestbasedonrankscanbeusedtoinvestigatewhetherthesampleofcorrectanswerscamefrompopulationswiththesamedistribution.InTableIIwereporttheresultsofapairwisecomparisonofthedifferenttreatments.AQUARTERLYJOURNALOFECONOMICS796 numberintheintersectionofrowandacolumnindicates,forthecorrespondingpairoftreatments,theprobabilityofgettingatleastasextremeabsolutevaluesoftheteststatisticasweobserve,giventhatthetwosamplescomefromthesamedistribution.ThedifferencebetweenthedistributionsinthezeropaymentandinthelowpaymentissigniŽcant,ata.9levelofsigniŽcance.Thedifferencebetweenthedistributionsinthehighpayofftreatments(1NISand3NIS)isnotsigniŽcant.Finally,thedistributionsintheselattertreatmentsaresigniŽcantlyhigherthanthedistributionsinthecaseofthezeroand10centsmarginalpayoffs.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.0875——NIS1.0687.0004—NIS3.0708.0006.6964* (Prob.. z ,wherezistheteststatistic).Anasteriskindicatesthatforthatcomparisonwecannotreject(ata.9levelofsigniŽcance)thehypothesisthatthetwosamplescomefromthesamedistribution.PAYENOUGHORDON’TPAYATALL797 tophalfandthebottomhalfoftheparticipantsaccordingtoperformance,andwethentestedthesigniŽcanceofthedifferencebetweendistributions.TheresultsarepresentedinTablesIIIaandIIIb.Asimilarcomparisoncanbemadebetweenthedistributionofthetoptenparticipants.Thedifferencebetweenthe1NISand3NISisclearlynotsigniŽcant.Thedifferencebetweenthe10centsand1NISaswellas3NISissigniŽcant.Thediversityinindividualperformancemaybeduetodifferencesinseveraldifferentfactors,suchasskill,generalknowledge,andpreferencesformoneyandeffort.Ourresultsseemtoindicatethattheeffectoftheintroductionofmonetaryincentivesandtheirchangeaffectinthesamewayindividualswithdifferentcharacteristics,ashighertalent,orhigherwilling-nesstoputouteffort.4.TheDonationExperiment:DesignToillustratethenextstudyapremiseisnecessary.InIsraelafew‘‘donationdays’’takeplaceeveryyear.Eachofthesedaysisdevotedtoasocietythatcollectsdonationsfromthepublicforsomepurpose,suchascancerresearch,disabledchildren,etc.High-schoolstudentsgofromdoortodoortocollectthedonations.TABLEIIIaMANN-WHITNEYUTESTSBASEDONRANKSWITHPAIRWISECOMPARISONSOFMEDIANSOFCORRECTANSWERSBYTREATMENT,USINGTHEBEST20OBSERVATIONSOFEACHTREATMENT Nopayment10centsNIS110cents.0381——NIS1.0146.0003—NIS3.0339.0008.4222* TABLEIIIbMANN-WHITNEYUTESTSBASEDONRANKSWITHPAIRWISECOMPARISONSOFMEDIANSOFCORRECTANSWERSBYTREATMENT,USINGTHE20WORSTOBSERVATIONSOFEACHTREATMENT Nopayment10centsNIS110cents.0299——NIS1.0120.0000—NIS3.0270.0001.7552* QUARTERLYJOURNALOFECONOMICS798 Normally,thestudentsareorganizedintogroupsaccordingtotheclassinwhichtheystudy,andeachgroupisthendividedintopairsofstudentswhoworktogetherasateam.Eachpairreceivesacertainnumberofcoupons,whichserveasreceiptsforthedonors.Theamountcollectedbyeachpaironthedonationdaydependsmostlyontheeffortinvested:themorehousestheyvisit,themoremoneytheycollect.Thisisespeciallytruebecausethestudentsdonothaveto‘‘sell’’thedonation,sincemostpeoplearealreadyfamiliarwithitfromtelevisionannouncementsandWehad180high-schoolstudentsaroundtheageof16participatingwiththreetreatmentlevels.Thereweretwogroupsofparticipants,eachwithŽfteencouples,foreachtreatment.EachpairreceivedcouponsamountingtoNIS500altogether.Inthediscussionthatfollowswereportjointlytheresultsforthetwogroupsateachtreatmentlevel.IntheŽrsttreatmentanexperimenterappearedbeforeeachofthegroupsandtoldthemabouttheimportanceofthedonationtheyweretocollect,andthatthesocietywishedtomotivatethemtocollectasmuchmoneyaspossible.Theyweretoldthattheresultsofthecollectionwouldbepublished,sothattheamountcollectedbyeachpairwouldbecomepublicknowledge.Thesecondtreatmentwasconductedsimilarly:butafterthesamespeech,eachpairwaspromised1percentoftheamountthatthetwoofthemcollected.Finally,inthethirdtreatmenteachpairwaspromised10percentoftheamounttheycollected.Inthesecondandthirdtreatmentsitwasmadeclearthatthepaymentwasmadefromfundsadditionaltothedonation,pro-videdbyus,andthatthesocietieswouldreceivethetotalamountofthedonationasusual.Theactivityofcollectingdonationsthenwentonasusual,accordingtotheproceduredescribedabove.5.TheDonationExperiment:ResultsThepreciseamountcollectedbyeachgroupforthethreedifferenttreatmentsisreportedinAppendix3.WereportthemostimportantsummarystatisticsinTableIV.Theaverageamountcollectedwas238.67over500forgroupsintheŽrsttreatment(withnopayment).Theaveragefellto153.67inthesecondgroup.Itwas219.33,higherthaninthesecondtreatment(butlowerthantheŽrst)inthethirdtreatment.TotestthesigniŽcanceoftheseresults,weusethenonpara-metricMann-WhitneyUtestbasedonrankstoinvestigatePAYENOUGHORDON’TPAYATALL799 whethertheamountsofmoneydonatedcamefromthesamedistribution.TheresultsofthetestarereportedinTableV.ThedifferencebetweentheaveragecollectionintheŽrstandinthesecondgroupissigniŽcant,ata.9levelofsigniŽcance.Whenthepayoffincreasedto10percentoftheamountcollected,theaveragecollectionwas219.33.TheamountscollectedinthistreatmentweresigniŽcantlyhigherthantheamountscollectedinthe1percenttreatment,butnotsigniŽcantlyhigherthantheamountscollectedwhennopayoffwasgiven.Wecomparedthetoptencollectionsineachtreatment.Thedifferencebetweentheamountscollectedinthe1percenttreat-mentandtheamountscollectedintheothertwotreatmentswassigniŽcant.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.0977—10percent.7054*.0515 QUARTERLYJOURNALOFECONOMICS800 taltoperformance.Sinceincentivesareusuallydesignedtoaffectperformanceinanoptimalway,itisinterestingtoinvestigatewhetherthiseffectisanticipated.Toaddressthisquestion,weconductedatestbasedonboththeIQanddonationexperiments.Inbothcasessubjectswerepromisedapaymentproportionaltotheperformanceofadifferentperson(their‘‘agent’’),andtheyhadtochoosetheincentiveschemefortheagent.1.TheIQExperimentwithPrincipalandAgentsThesubjectsintheexperimentwere53studentsintheroleofprincipals.Theyweretoldthattheywouldbematchedwithanotherplayer.Theyweregivenashortintroductioninwhichtheyreceivedanexplanationofthetaskthattheir‘‘agents’’wouldperform,namely,answeringquestionsfromtheadmissiontestthatthesubjectstookintheIQexperiment.Theywerethentoldthateachoneofthemwouldbepaid1NISforeverycorrectanswergivenbyhisagent.Theprincipalshadtochoosewhetherapaymentof10centsofNISorazeropaymentwastobemadetotheiragentforeverycorrectanswer.Thispaymentwouldbepaidoutoftheamountof1NISpaidtotheprincipal.Theprincipalsweretoldthattheagentwouldknowinadvancehowmuchhewasgoingtobepaidforeverycorrectanswer,butthathewouldnotknowthattheprincipalhadtodecideŽrstwhethertopayhimnothingor10cents.Hewouldnotevenknowthataprincipalexisted.Thiswastheonlydecisiontheprincipalshadtomake.Attheendoftheexperimentparticipantsweretoldwhereandwhentogotocollecttheirearnings.Outofthe53subjects46subjects,aproportionof87percent,chosetopay10centsforeverycorrectansweroftheagent.Withthischoicetheyreducedtheirincomeintwoways:byprovidingapaymenttotheagent,andbyreducingtheperformanceoftheagentbecauseofthenegativeeffectoflowrewards.2.TheDonationExperimentwithPrincipalandAgentsInthedonationexperimentwealsohadagroupofstudentswhoplayedtheroleof‘‘principals.’’Theyweretoldthattheywouldbematchedrandomlywithonepairwhohadalreadycollectedmoney,andwouldbepaid5percentofwhatthispairhadcollected.TheprincipalshadtodecidewhethertheywantedustochoosethepairfromthegroupthatdidnotreceiveanypayofforPAYENOUGHORDON’TPAYATALL801 fromthegroupthatreceived1percentofwhattheyhavecollected.Thepaymenttotheagentwasmadeoutofthe5percent.TheresultsconŽrmedwhatweobservedintheprevioustest.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.IntrinsicandExtrinsicMotivationAŽrstinterpretationoftheseresultsispossiblealongthelinesprovidedbycognitivepsychologists:theactivityhasanintrinsicmotivation,andtheintroductionofamonetaryreward,whichisanextrinsicmotivation,displacestheŽrst,andtheneteffectmaybeareductionintheactivity.WehavetoseewhetherthisexplanationisjustiŽedinthecaseofourexperiments.AŽrstversionoftheinterpretationisthatthesubjectisweightingintrinsicandextrinsicmotivation,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,basedonattributiontheoryalongthelinesŽrstsuggestedinFestinger{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,thecontractisprobablyinterpretedas‘‘Apaymentof60NISisprovidedforparticipationintheexperiment,andInowknowthatthisparticipationconsistsofansweringthequestions.’’Some(butnotall)ofthesubjectsfeltthatitwastheirsideofthebargaintoanswerthosequestions.PAYENOUGHORDON’TPAYATALL803 Theintroductionofadditionalcompensationforcorrectan-swerschangestheperceptionofthecontract:‘‘SixtyNISwerepaidforshowingup.Theactivityofansweringthequestionsisnowpaidbyrate.’’Thisrateisnowthereferencepointtodecidetheappropriateintensityoftheactivity.Whentherateislow(10cents),theactivityislow:thereisnonecessaryconnectionwiththelevelofactivityprovidedinthatdifferentsituation,whereansweringquestionsis‘‘due.’’Animportantpredictiongivenbyourexplanation(butalsobythesecondversionofthepreviousinterpretation)isthatthechangeinperception,oncerealized,ishardtoreverse.ThisisindeedthecaseinarelatedŽeldstudy{GneezyandRustichini2000}thatweconductedontheeffectofpenalties.Thestudywasconductedinagroupofday-carecenters,whereparentswerecominglaterthantheduetimetocollecttheirchildren.InthetestgroupweintroducedatthefourthweekofthestudyaŽneforlatearrival.TheŽnewas10NISforadelayoftenminutesormore.TheŽnewascancelledattheseventeenthweek.TheeffectwasanincreaseinthenumberoflatearrivalsaftertheintroductionoftheŽne.InFigureIwereporttheaveragedelaysforthecontrolandthetestgroup,inthetwenty-weekperiod.Thisresultisconsistentwithashiftinperceptionofanincompletecontract,asintheinterpretationwehavejustpro-vided.Furthersupportforthisexplanationcomesfromthebehaviorofparentsaftertheseventeenthweek:thenumberofFIGUREIAverageNumberofLate-ArrivingParentsEachWeek,byGroupTypeQUARTERLYJOURNALOFECONOMICS804 latearrivalsstayedconstant,asonewouldexpectaftertheperceptionofthecontracthaschanged.AninterestingextensionoftheIQexperimentdesignedtotestthistheorywouldbetotaketheparticipantsoftheIQquizexperiment,where10centshasbeenofferedpereachquestionansweredcorrectly,andinasecondexperimentaskthemtoperformthesametask,fornocompensation.Weconjecturethattheperformancewillbeworsethantheoneofsubjectswhohavebeenofferedzerocompensationfromthestart,andofcourseworsethantheperformanceofthesameparticipantsintheŽrst4.HowSmallIsaSmallAmount?Inourexperimentsthesubjectswhowerepaid10centsfor1NISforeachrightanswergaveaworseperformancethandidthosewhowerenotgivenanypayment.Tencentsmaysoundlikeverysmallcompensation,almostinsultingandthereforethepracticalimplicationsofourŽndingsminimal;buttwoqualiŽca-tionsarenecessary.First,notallsmallcompensationsmaybeconsideredinsulting.Forexample,considerthepracticeofpayingbackasmallamountforrecyclingasoftdrinkbottle,whichiscommoninmanyEuropeancountries.Anecdotalevidencesug-geststhatpeoplearelesswillingtorecyclewhenthissmallcompensationisoffered,thantheyareinplaceswherenomoneyisoffered,andfailuretorecycleissimplyconsideredbadbehavior.Itisunlikelythattheamountofferedisconsideredinsulting.Adifferentexplanationinthiscasemightbethatpeopleareafraidoflooking‘‘cheap’’formakingtheeffortofrecyclingtocollectthesmallamount.Second,insultingcompensationsarenotnecessarilysmallcompensations.Thereasonisthattheamountofmoneyofferedchangestheperceptionthatpeoplehaveof‘‘whatthecontractisabout.’’Inparticular,itmaynotbesafetoassumethataddinganincentiveleavestheutilityoftheotherincentivesunchanged.Acertainamountofmonetarycompensationmaybeperceivedastoosmallwhencomparedwiththeotherrelevantfactors,evenifitisnottoosmallinitself.Wemaythinkofreal-lifesituationswhereanontrivialamountofmoneymaysounddisproportionatelysmallcomparedwithotherfactors.Forinstance,anincreaseinsalaryby$200permonthtoaprofessor,ascompensationforasmallerPAYENOUGHORDON’TPAYATALL805 office,maybeworsethannocompensation.Similarly,smallhonorariaforseminarspeakersmaybecounterproductive.11Thisfactorislikelytobemoreimportantwhenfactorslikehealthorreputationareatstake.Sowhileinourexperimentsitisclearthat‘‘toosmall’’issomewherebetween10centsand1NIS,theexactdeterminationofthisquantityinexperimentalorreal-lifesituationsislikelytobedifficultandsubtle.Ourtheoryhasaninterestingimplicationforexperimentaleconomics.Itseemswidelyacceptednowthatasufficientlyhighrewardissufficienttoreducethevarianceoftheobservedbehavioraroundthemeanvalueofthebehavioraspredictedbythetheory.Theseeminglynaturalimplicationthatasmallrewardsimplyproduceshighervariancemightbefalse:atthelowendofthescaleofrewards,theremightbeparadoxicalbehavior,ofthetypeobservedinourexperiments.Infact,thebehaviorwithsmallpaymentmaybe,asitisinourexperiments,moredistantfromthepredictionthanthebehaviorwithzeroproportionalpayment.Thismaybeimportantincaseswherelargepaymentsareimpossible,forexample,becauseofethicalorlegalreasons.Therulethat‘‘asmallpaymentisbetterthannothing’’mightbeabadrule.125.TheTwoExperimentsThereisofcourseanimportantdifferencebetweenthetwoexperiments.Inthedonationstudythereisanintrinsicmotiva-tionthatisclearlyidentiŽable:thealtruisticreasonthatis,afterall,themotivationforthestudentsbeforetheybecamesubjectsinourexperiment.Thisdifference,forinstance,mayexplainasigniŽcantdifferenceinbehaviorbetweenthetwostudies.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,hasbeenconŽrmed:buttheperformancemaybelowerbecauseoftheintroductionofthecompensation.Onthebasisofthispreciseevidencewemaybeginthesearchforasatisfactoryexplanation.Furtherresearch,intheoryandexperiments,isnecessary,andwehaveindicatedsomeofthepromisingdirections.Inthemeantime,themostconvincingexplanationseemstoustobebasedoncognitivearguments:contracts,socialorprivate,areusuallyincomplete,andregulateaninteractioninasituationofincompleteinformation.TheintroductionofarewardmodiŽessomeofthetermsofthecontract,butalsoprovidesinformation.Thenewbehaviorpro-ducedbythecontractisaresponsetothecombinationofanewpayoffstructureandthenewinformation.ThedifficultyisthatthestandardBayesianupdatingofinformationseemsunsuitedforthissituation.APPENDIX1:INSTRUCTIONSFORTHEIQEXPERIMENTITheinstructionsaresimple,andifyoufollowthemcarefullyyoumayearnaconsiderableamountofmoney.Theexperimentwilltakeabout45minutes.Intheexperimentyouareaskedtoansweraquizof50problemstakenfromapsychometrictestusedtoscanapplicantstotheuniversity.ItisasortofIQtest.YouwillbepaidNIS60forshowinguptotheexperiment. Thefollowingsentencewasnotincludedintreatment1:‘‘Inaddition,youwillbepaidNIS0.1’’(intreatment2,NIS1intreatment3,NIS3intreatment4)foreverycorrectansweryougive. Themoneywillbepaidtoyou,privatelyandincash,attheendoftheexperiment.Doyouhaveanyquestions?PAYENOUGHORDON’TPAYATALL807 APPENDIX2:THENUMBEROFCORRECTANSWERSGIVENINTHEIQEXPERIMENTBYPARTICIPANTSACCORDINGTOTREATMENTS Obs.#NopaymentObs.#10centsObs#NIS1Obs.#NIS314941508149121502484244824712250348434483471234744544438446124455424540854612544642463986451264474247368744127448404835884412843937493589441294210375035904313041113751349141131411237523492411323913365332934113339143654329440134391536553195401353816355630963813638173457269738137371834582698381383719345926993813937203160261003714037213161241013414137223162231023314236233163231033314336242964221043314434252965211053114533262466211063114631272367211073014731282368191082914831292369191092914928302270131102915027312271111112815126322072811228152253320730113261532534187401142315421357750115221552036376011622156203707701172215719380780118211581939079011920159174008001201716016 QUARTERLYJOURNALOFECONOMICS808 TECHNION,HAIFA,ISRAELBOSTONUNIVERSITYREFERENCESArrow,K.J.,‘‘GiftsandExchanges,’’PhilosophyandPublicAffairs,I(1972),343–362.Bem,D.J.,‘‘AnExperimentalAnalysisofSelf-Persuasion,’’JournalofExperimen-talandSocialPsychology,I(1965),199–218. ,‘‘Self-Perception:AnAlternativeInterpretationofCognitiveDissonancePhenomena,’’ PsychologicalReview, LXXIV(1967),183–200. Bewley,T.,‘‘ADepressedLaborMarketasExplainedbyParticipants,’’AmericanEconomicReview,PapersandProceedings,LXXXV(1995),250–254. ,‘‘ADepressedLaborMarketasExplainedbyParticipants,’’manuscript,DepartmentofEconomics,YaleUniversity,1997.APPENDIX3:THEAMOUNTOFMONEYCOLLECTEDBYSTUDENTSINTHEDONATIONEXPERIMENTACCORDINGTOTREATMENTS Obs.#NopaymentObs.#1%Obs.#10%10310610203206203033063204403406420580350653061003606650710037067100812038068100912039069120101304030701401115041507115012150428072150131504310073150141904412074150152004515075180162004615076200172404715077200182504818078240192504921079250203005023080250213305124081290223405224082290233505325083350244205425084380254505525085400265005630086410275005733087460285005840088500295005940089500305006050090500 PAYENOUGHORDON’TPAYATALL809 Camerer,C.F.,andR.M.Hogarth,‘‘TheEffectsofFinancialIncentivesinExperiments:AReviewandCapital-Labor-ProductionFramework,’’1999,CaliforniaInstituteofTechnologyDiscussionPaperNo.1059,in Journalof RiskandUncertainty, XIX(1999),7–42. Cameron,J.,andW.D.Pierce,‘‘Reinforcement,Reward,andIntrinsicMotivation:AMeta-Analysis,’’ ReviewofEducationalResearch, LXIV(1994),363–423. Deci,E.,‘‘EffectsofExternallyMediatedRewardsonIntrinsicMotivation,’’JournalofPersonalityandSocialPsychology,XVIII(1971),105–115. ,IntrinsicMotivation(NewYorkandLondon:PlenumPress,1975).Deci,E.,E.L.Cascio,andJ.Krusell,‘‘SexDifferences,VerbalReinforcementandIntrinsicMotivation,’’PaperpresentedattheMeetingoftheEasternPsycho-logicalAssociation,Washington,May1973.Eisenberger,R.,andJ.Cameron,‘‘DetrimentalEffectsofReward.RealityorMyth?’’ AmericanPsychologist, LI(1996),1153–1166. Fehr,E.,S.Gachter,andG.Kirchsteiger,‘‘ReciprocityasaContractEnforcementDevice,’’LXV(1996),833–860.Fehr,E.,andS.Gachter,‘‘ReciprocityandEconomics:TheEconomicImplicationsofHomoReciprocans,’’ EuropeanEconomicReview, XLII(1998),845–859. Fehr,E.,andB.Rockenbach,‘‘TheHiddenCostsofEconomicIncentives.Contrac-tualContingenciesCrowdOutVoluntaryCooperationandReciprocity,’’Univer-sityofZurichDiscussionPaper,2000.Festinger,L.,ATheoryofCognitiveDissonance(Evanston,IL:Petersen,1957).Frey,B.S.,‘‘HowIntrinsicMotivationIsCrowdedinandout,’’ Rationalityand Society, VI(1994),334–352. Frey,B.S.,F.Oberholzer-Gee,andR.Eichenberger,‘‘TheOldLadyVisitsyourBackyard:ATaleofMoralsandMarkets,’’ JournalofPoliticalEconomy, CIV (1996),1297–1313. Frey,B.S.,andF.Oberholzer-Gee,‘‘TheCostofPriceIncentives:AnEmpiricalAnalysisofMotivationCrowding-out,’’ AmericanEconomicReview, LXXXVII (1997),746–755. Gneezy,U.,andA.Rustichini,‘‘AFineIsaPrice,’’JournalofLegalStudies,XXIX(2000),1–18.Heider,F.,ThePsychologyofInterpersonalRelations(NewYorkCity,NY:Wiley,1958).Kelley,H.H.,‘‘AttributionTheoryinSocialPsychology,’’NebraskaSymposiumonXV(1967),192–238. ,AttributioninSocialInteraction(NewYorkCity,NY:GeneralLearningPress,ModuleSeries,1971).Kohn,A.,PunishedbyRewards(Boston,MA:HoughtonMifflin,1993a). ,WhyIncentivePlansCannotWork, HarvardBusinessReview, LXXI(1993b), 54–63. Kruglansky,A.W.,S.Alon,andT.Lewis,‘‘RetrospectiveMisattributionandTaskEnjoyment,’’JournalofExperimentalSocialPsychology,VIII(1972),493–501.Lepper,M.R.,andD.Greene,TheHiddenCostsofReward:NewPerspectivesinthePsychologyofHumanMotivation(Hillsdale,NJ:LawrenceErlbaumAssoci-ates;NewYork:1978).Skinner,B.F.,ScienceandHumanBehavior(NewYork,NY:Macmillan,1953).Smith,V.L.,andJ.M.Walker,‘‘MoneyRewardsandDecisionCostinExperimen-talEconomics,’’EconomicInquiry,XV(1993),245–261.Titmuss,R.M.,TheGiftRelationship(London,UK:AllenandUnwin,1970). ,‘‘TheGiftofBlood,’’Trans-action,VIII(1971);nowinThePhilosophyofWelfare,SelectedWritingsbyR.M.Titmuss,B.Abel-SmithandK.Titmusseds.(London,UK:AllenandUnwin,1987).QUARTERLYJOURNALOFECONOMICS810

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