8. The Behavioural Economics of Incentives

Question 1

Piece rate incentives

Answer 1

Where a worker is paid per unit they produce

Question 2

Up to what point do payoff maximisers exert effort?

Answer 2

Up to the point where MC of an additional unit of effort is equal to the MR for the additional unit of effort

Question 3

What is the real effort task experiment?

Answer 3

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

Question 4

Results of real effort task

Answer 4

• effort isn’t changed as long as cost/ prize ratio is the same
• increasing cost of clicks, reduces clicks
• increasing prize, increase clicks

Question 5

Describe the production function of catches in the real effort task

Answer 5

Production function catches = f(clicks, Ę)

Increasing, concave, stable across different prize levels

Question 6

Results of real effort task, team production

Answer 6

In team people get less cooperative over time but are still not fully selfish

Question 7

Results of gift exchange real effort task

Answer 7

Much stronger relationship between effort and wages with partner than stranger

Question 8

Results of tournament real effort task

Answer 8

People play as selfish expected payoff maximisers

Question 9

Results of NYC taxi driver observations

Answer 9

Drivers work less when wages are higher

Question 10

Why do NYC taxi drivers work less when wages are higher?

Answer 10

They have daily income targets and reference dependent preferences

Question 11

Describe experiment 1 of Fehr and Gatte 2007

Answer 11

• 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

Question 12

Results of experiment 1 Fehr and Gatte

Answer 12

Group with higher wage worked more shifts but less effort since they are consistent with reference dependent preferences

Question 13

Describe experiment 2 of Fehr and Gatte?

Answer 13

Couriers engaged in two part gamble choice that showed if they were loss averse

Question 14

Results of experiment 2 of Fehr and Gatte

Answer 14

• both type of couriers increase shifts with wages

* Non loss averse couriers hold effort when wage is increased but loss averse couriers drop effort

Question 15

Incentive comparability constraint

Answer 15

It must align the incentives of the agent and the principal

Question 16

Participation constraint

Answer 16

The agent must want to accept the contract

Question 17

Describe the principal agent experiment (Anderhub, Gächter)

Answer 17

• 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

Question 18

Results of principal agent experiment

Answer 18

• 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

Question 19

Are the experts effort choices rational?

Answer 19

• 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

Question 20

Describe the experiment a fine is a price Gneezy and Rustichini 2000)

Answer 20

To prevent parents being late picking their kids up from school, a fine was introduced

Question 21

Results of a fine is a price experiment

Answer 21

• 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

Question 22

Describe the experimental design of the investor and the trustee

Answer 22

•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

Question 23

What are the results of the investor and trustee experiment?

Answer 23

• 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