Modern principles of economics, Chapter 22 Flashcards
incentive schemes
policymakers needs to design incentives carefully to align what they pay for with what they actually wan to achieve
piece rates
workers are paid for their product output rather than time worked
advantages.disadvantage of piece rates
advantage: Workers are motivated to work harder and faster because the more they produce, the more they earn.
disadvantage: reduce in quality
why does piece rate not always work, for example in the car industry
sometimes factors out of their control (price of cars and gas, state of economy)
whats the problem with piece rates in certain economies?
how much staff will earn depends on the situation of the economy
whats the disadvantage of fixed salary
less motivation
tournament theory
when sales depend on factors like the economy, tying bonuses directly to sales may unfairly penalize staff for things they cannot change. so you use the tournament system: Workers are rewarded based on relative performance (how well they do compared to others).
whats the downside of paying tied to relative performance
people may take too many risks, because if they pay off, they get big bonuses.
Environment Risk
Risks caused by factors outside everyone’s control, like the economy or market conditions.
Ability Risk
Risks caused by differences in individual abilities between workers
tournament: environment risk and ability risk
Can reduce environment risk by rewarding employees for their performance compared to others.
However, they increase ability risk because people with less experience or skill might compete unfairly
grading on a curve, when is it motivating?
graded relative to each other’s performance. only the top 10% of students get an “A,” the next 20% get a “B,” and so on
Motivates students to study when the main risk is environmental (a bad professor, meaning everyone struggles equally).
However, it reduces cooperation and creates competition based on ability risk (students with different skill levels).
absolute grading, when is it motivating?
works good if students have different abilities, it reduces unfair comparisons but can discourage effort if the main problem is environment risk (poor teaching)
Intrinsic motivation
Sometimes people do things not for money but because it gives them enjoyment, pride, or a sense of purpose
Corporate culture
the shared values and norms in a workplace that guide how people behave
