Abstract
Conventional wisdom suggests that a global increase in monetary rewards should induce agents to exert higher effort. In this paper we demonstrate that this may not hold in team settings. In the context of sequential team production with positive externalities between agents, incentive reversal might occur, i.e., an increase in monetary rewards (either because bonuses increase or effort costs decrease) may induce agents that are fully rational, self-centered money maximizers to exert lower effort in the completion of a joint task. Incentive reversal happens when increasing one agent's individual rewards alters her best-response function and, as a result, removes other agents' incentives to exert effort as their contributions are no longer required to incentivize the first agent. Herein we discuss this seemingly paradoxical phenomenon and report on two experiments that provide supportive evidence.
| Original language | English |
|---|---|
| Pages (from-to) | 72-83 |
| Number of pages | 12 |
| Journal | Journal of Economic Behavior and Organization |
| Volume | 97 |
| DOIs | |
| State | Published - Jan 2014 |
Bibliographical note
Funding Information:We are deeply grateful to The Israeli Foundation Trustees (IFT), the German Research Foundation (DFG), the German-Israeli Research Foundation and Google for funding this project. The authors thank Dirk Engelmann, the associate editors, two reviewers, and seminar participants at The Center for the Study of Rationality, The Max Planck Institute for Research on Collective Goods, University of Bonn, University of Mannheim, University College London, University of Warwick and at ESA meetings in Lyon and Haifa for comments and suggestions. Esteban Klor thanks the NBER and Boston University for their hospitality while he was working on this project.
Keywords
- Externalities
- Incentive reversal
- Incentives
- Laboratory experiments
- Personnel economics
- Team production