L05 Empirical Evidence on C&B

Question 1

What is the targeting effect?

Answer 1

Managers can affect the productivity of their subordinates by taking actions affecting the productivity of existing workers:

Given the limited time span of attention, abler workers are targeted more (analog incentive effect).

Question 2

What is the selection effect?

Answer 2

Managers can affect the productivity of their subordinates by choosing the most able workers into employment (analog to sorting effect)

Question 3

What are the implications of Bandiera, Barankay and Rasul (2007)?

Answer 3

• Targeting and selection effetcs reinforce each other as workers with higher productivity gains are also more likely to be in employment
• Bonuses for managers may be more efficient than for workers as managers are better monitors than the principal
• Disadvantage of manager bonus: Increase in earnings inequality undermining team spirit

Question 4

What are the theoretical implications of loss aversion on C&B practices?

Answer 4

• People would do more to avoid a loss than to receive the same value of gain
• => Monetary incentives framed as a loss will induce more effort

Question 5

What is the main result regarding productivity in Hossain and List (2012) and what are 3 reasons for the result?

Answer 5

• Incentives framed as a loss a more 1% more effective for groups but not for individuals.
• Why? 3 reasons
  
  • Peer pressure: A worker don’t want to be the one who brings punsihment for the whole team
  • Individual loss aversion is magnified by team size: One very loss averse worker can influence the whole team
  • Older workers and and men reduce strength of framing effect

Question 6

What are the 3 implications of framing losses instead of gains in Hossein and List (2012)?

Answer 6

1. Framing is cheap and long-lasting productivity-enhancing tool
2. 1% productivity gain will make a real difference in the long run
3. Framing is best applied in teams rather than for individuals

Question 7

Choking under pressure:

What is the Yerkes-Dodson law?

Could this law be confirmed by Ariely et al. (2009)?

What are the implications?

Answer 7

• Yerkes-Dodson law states that there is an optimal strength of incentives. Stronger incentives than the optimal level result in excessive stress that weakens performance especially for difficult tasks
• Ariely et al. (2009): Yes, stronger incentives improve performance in simple task but worsen performance in difficult task
• Implications:
  
  • Stronger incentives do not necessarily lead to better performance
  • Overly strong incentives decrease performance when tasks require high cognitive effort
  • People might not be able to take choking under pressure into account when optimizing effort
  • Paying flat wages might be optimal for cognitive tasks

Question 8

Summary of lecture on Empirical Evidence on C&B:

Incentives/Framing/Strength (3/1/2 aspects)

Answer 8

1. Incentives work through
   
   • Inducing higher effort
   • Attracting more productive employees who gain from incentives more
   • Encouraging managers to manage more effectively
2. Framing of incentives plays a role:
   
   • Malus is more effective than bonus for groups
3. Incentives can be too strong:
   
   • Choking under pressure
   • Fraud