8. The Behavioural Economics of Incentives Flashcards
Piece rate incentives
Where a worker is paid per unit they produce
Up to what point do payoff maximisers exert effort?
Up to the point where MC of an additional unit of effort is equal to the MR for the additional unit of effort
What is the real effort task experiment?
An electronic simulation of catching balls in a tray, there are points for catching the ball and points deducted for every click since this is the cost of effort
Results of real effort task
- effort isn’t changed as long as cost/ prize ratio is the same
- increasing cost of clicks, reduces clicks
- increasing prize, increase clicks
Describe the production function of catches in the real effort task
Production function catches = f(clicks, Ę)
Increasing, concave, stable across different prize levels
Results of real effort task, team production
In team people get less cooperative over time but are still not fully selfish
Results of gift exchange real effort task
Much stronger relationship between effort and wages with partner than stranger
Results of tournament real effort task
People play as selfish expected payoff maximisers
Results of NYC taxi driver observations
Drivers work less when wages are higher
Why do NYC taxi drivers work less when wages are higher?
They have daily income targets and reference dependent preferences
Describe experiment 1 of Fehr and Gatte 2007
- In treatment period 1 group A of Swiss couriers were given a pay rise, group B held constant.
- In treatment period 2 group B get pay rise, group A held constant.
- find changes in shifts taken and effort
Results of experiment 1 Fehr and Gatte
Group with higher wage worked more shifts but less effort since they are consistent with reference dependent preferences
Describe experiment 2 of Fehr and Gatte?
Couriers engaged in two part gamble choice that showed if they were loss averse
Results of experiment 2 of Fehr and Gatte
- both type of couriers increase shifts with wages
* Non loss averse couriers hold effort when wage is increased but loss averse couriers drop effort
Incentive comparability constraint
It must align the incentives of the agent and the principal
Participation constraint
The agent must want to accept the contract
Describe the principal agent experiment (Anderhub, Gächter)
- A firm owner employs an expert to run the firm
- the expert can accept or reject offer
- expert chooses how much effort to put into the firm
- expert is paid fixed payment and share of revenue, owner gets the rest
Results of principal agent experiment
- majority of contracts had negative fixed payments
- share =100% was most common offer but lots were lower
- contracts were almost completely between the participation constraint and equally split
- experts are much more likely to reject contract if s is low
- evidence of fairness considerations
Are the experts effort choices rational?
- when offered low s, experts put in less effort than rational
- when offered high s, experts put in more effort than rational
- evidence of reciprocity
Describe the experiment a fine is a price Gneezy and Rustichini 2000)
To prevent parents being late picking their kids up from school, a fine was introduced
Results of a fine is a price experiment
- once fine was introduced, the number of late parents more than doubled
- after fine was removed, the number stayed at high level
- introducing the fine changed a relationship based on good wills into a transactional relationship in which the fine is the price for being late
Describe the experimental design of the investor and the trustee
•both receive 10 monetary units each
•investor can send 0-10 to the trustee, amount sent is tripled
•trustee sends back any amount they want
•treatments
Trust condition: as above
Investor condition: investor can choose to have the trustee fined if they send back less than the desired amount
What are the results of the investor and trustee experiment?
- the higher the amount sent, the higher the amount sent back
- incentive condition- fine imposed saw lower transfers back
- incentive condition- fine not imposed saw even higher transfers back