Econ 2220: Topics in Experimental Economics Lecture 10: Incentives Incentives 1. • • 2 2. • • • Monetary Do monetary incentives improve performance? Too low? Too high? Non monetary Praise, respect Intrinsic rewards: Small changes in extrinsic or intrinsic incentives alters the frame and changes the contract Image : Concern for what others think • Living up to norms/expectations • Improving view others have of you (social image, status) 1. Monetary Incentives • Questions: – How H d does b behavior h i respond d to monetary iincentives? i ? – Does effort increase when incentives are improved? – Can rewards have detrimental effects on performance? – Can fines encourage ‘bad’ bad behavior? – Does it depend on the size of the incentive: Low vs. high? Leading in to extrinsic vs. intrinsic: Are the ‘norms’ surrounding a transaction influenced by the extrinsic incentives? Does the i t d ti off monetary introduction t exchange h change h th the ““contract”? t t”? Gneezy and Rustichini: “Pay ay e enough oug o or do don’tt pay at a all”,, QJ QJE • Experiment 1: – 160 students from the university of Haifa asked to answer 50 questions taken from an IQ test (45 min). Questions involve reasoning and computation as opposed to just general knowledge. – Participants given a 60 NIS show up fee. Compensation per question solved varies across treatments (Participants receive 60 NIS show up fee) • No additional incentives. • 10 cents p per correct q question. • 1 NIS per correct question. • 2 NIS per correct question. Donation Solicitation • Experiment 2: the Donation Experiment. – Examine the effect of compensation on volunteering? – In Israel a few ‘‘donation days’’ take place every year. Each of these days is devoted to a society that collects donations from the public for some purpose, such h as cancer research, h di disabled bl d children, hild etc. t Hi Highh school students go from door to door to collect the donations. – Students are put in pairs. Each pair receives a certain number of coupons which serve as receipts for the donors coupons, donors. The amount collected by each pair on the donation day depends mostly on the effort invested: the more houses they visit, the more money they collect. This is especially true because the students do not have to ‘‘sell’’ the donation, since i mostt people l are already l d ffamiliar ili with ith it ffrom ttelevision l i i announcements and advertisements. Donation Solicitation • • 180 high school students around the age of 16, each pair received coupons for NIS 500. – Group 1: Amounts collected by group be made public. – Group p 2: Each g group p receives 1% of the amount collected. – Group 3: Each pair receives 10% of the amount collected. In each case: Payment is made out of funds from the experimenter, not the money collected (and that is known by participants in advance.) Perception of Incentives • Principal-Agent IQ Experiment – 53 students will be “principals” and will be matched with one player, the “agent” from the IQ experiment. – They y receive 1 NIS for each correct answer of the agent. g – The principal decides whether the agent should be paid 0 or 10 cents of NIS for every correct answer. The principals told that the agent g would know in advance how much he would g get p paid,, but not that there was a choice about how much he’ll be paid, nor will he know an agent exists in the first place. – Payment y of agent g taken from p principals p p payment. y – 46 subjects (that is 87%) chose to pay 10 cents for every correct answer. Perception of Incentives • • Principal-Agent Donation Experiment – Principals matched with a pair of students who had already collected money, would be paid 5% of what that pair collected. – Principals p decide whether the p pair should be chosen from the group that did not receive any payment or from the group that received 1 percent of what they have collected. – The 1% p percent p payment y was taken from the p principals p 5% – Results confirmed the previous test: Out of the 25 participants, 19 (i.e. 76%) preferred to be matched with an agent who was paid 1 % of the amount collected. p Mistakes costly for two reasons: – Pay for compensation – Lower preformance Conclusion: Rewards • • • • The effect of incentives not monotonic: A discontinuity at zero payment of the effect of monetary incentive IQ: too low a reward detrimental – high enough increases performance – Low incentives (like 10 cents of a NIS) are insulting. Donation: Monetary incentives never restores to performance seen when free – Explanations: • An activity has an intrinsic motivation and extrinsic motivation crowds out the intrinsic one one. • Extrinsic motives changes the (incomplete) contract Question: Saw detrimental effect of a reward. What about a fine – can a penalty have a detrimental effect? II.e., e an increase in “bad” bad behavior? Gneezy and Rustichini: “A fine e is s a Price”, ce , Jou Journal a o of Legal ega Stud Studies, es, 2000. 000 • • • 10 private day care centers in the city of Haifa. Each holds at most 35 children hild ffrom age 1 - 4. 4 F Fee for f each h child hild iis NIS 1400 per month. th Agreement states that day care center operates between 7:30 am – 4 pm Prior to study, no fine for late pick-up. When parents did not come on time, a teacher would wait with the child. Teachers would rotate in this task, which is considered part of the job of a teacher, a fact that is clearly explained when a teacher is hired. Parents rarely came after 16:30. The overall period of the study was 20 weeks. – first 4 weeks recorded the number of parents who arrived late each week. – beginning of fifth week, introduced a fine in six of the 10 day-care centers, which had been selected randomly. Announcement of fine posted t d on daily d il read d bulletin b ll ti b board. d A Announcementt specified ifi d a fifine off NIS 10 for a delay of 10 minutes or more (price of sitter NIS 10-20/hour) – beginning of seventeenth week, fine removed with no explanation. Notice of cancellation posted on board. Results: Fine • • Fine increased the number of late coming parents The incentives changed the “contract,” the response is similar to that seen for small reward incentives (IQ and donation) • Potential mechanisms: • – Crowding-out of intrinsic motivation (IQ performance, giving) – Shift from a social frame to a monetary frame – Change Ch in i relationship l ti hi b between t principal i i l and d agentt ((guilt ilt vs. price, once a commodity always a commodity) Results demonstrate an interesting discontinuity. Negative effect of smallll incentives, i ti positive iti effect ff t off larger l incentives, i ti what h t about b t very large incentives? Does effort continue to increase? Ariely, Gneezy, Loewenstein and Mazar “Large St k and Stakes d Big Bi Mistakes.” Mi t k ” (R (ReStud St d 2008) • • Question: are there negative effects of large incentives? (holding income effects constant) “Choking under pressure” – Yerkes and Dodson ((1908)) “rats that were p placed in a cage g and forced to repeatedly choose between exploring one of two passages. On each trial, the experimenters randomly hung a white card in one passage and a black card in the other. While exploring the passage with the white card resulted in a reward, exploring the passage with the black card always resulted in a shock. For some rats the shock was always small, for some medium, di and d for f a third thi d group it was strong. t Th The main i fifinding di was that the rats learned to avoid the shocks most quickly when the shocks were at an intermediate level of intensity” (YerkesDodson law: increasing incentives past an optimal level can be detrimental to performance) – Practice vs. game Experiment 1: Rural India – Average monthly expenditure ~ 500 rupies (~$10). – 87 people randomly assigned to 4, 40 or 400 rupies condition. – Payment a function of achieving certain goals (rather than a linear function of p performance – eliminates income effect)) – Performed 6 different games in random order. For each game they receive the full amount if they reach the “very good” goal, and half the amount if they y reach the “good” g g goal. – Tasks: Packing quarters, Simon, Recall last 3 digits, Labyrinth (motor skill task), Dart Ball (motor skill task), Space Force (motor skill task), Roll Ball (motor skill task) (based on MIT pretest) – Note good performance on all six tasks and high condition corresponds to 6 months consumption Findings • • • Broadly little effect of moving from low to mid – may already reach peak performance at low Performance lowest in high Concern: – Games unfamiliar to subjects – Within subject response to incentives Experiment 2: MIT • Design: – Task: • Key press: alternate between “v” and “n” • Addition task: 3x3 matrix – find number that add to 10 Experiment 2:MIT • • Perform both tasks without compensation Perform both with high or low compensation – Low: • Addition: $0 if 1010 , $15 if 10+ 10+, w/ additional $1 $1.50 50 up to $30 • Key-press: $0 if 600-, $15 if 600+, w/ additional $0.10 up to $30 – High: • Addition: $0 < 10-, $150 if 10+, w/ additional $15 up to $300 • Key-press: $0 if 600-, $150 if 600+, w/ additional $1 up to $300 Conclusion • • • Incentives: – Too low may have a detrimental effects – Too high may cause chocking Aside: – Camerer, Babcock, Loewenstein, Thaler (1997) • Another example of odd response to incentives • NY cab bd drivers i – quit when earnings high – Continue when earnings low Incentives…not just monetary 2: Non-monetary incentives: R Respect, t praise, i di disapprovall • Markham, Scott, and McKee (2002) – Over a year, studying 1100 workers in four cut-and-sew garment factories compare the effect of a public recognition program: personal attention, public celebration and mementos. Employees with perfect attendance during a month had their names posted with a gold star for that month, and employees with no more than two absences during a quarter received a personal card notifying and d congratulating t l ti th them. At th the end d off th the year, a public bli plantl t wide meeting recognized good and perfect attendance. Employees with a perfect attendance record received engraved gold necklaces (females) and penknives (males) (males), whereas employees with a good attendance record received similar mementos in silver. The program reduced absenteeism by about 40 percent and was popular with the workers workers. Respect,praise • • “Paying Respect” Ellingsen and Johannesson (JEP 2007, AER 2008) – Why do academics work so hard for essentially fixed wages? – Request q for respect p & recognition g ((what others think of them)) – Model of behavioral agency theory: pay workers with a combination of monetary rewards and respect Disapproval? Non-monetary Non monetary Punishment in VCM • • • • • Masclet, Noussair, Tucker, Villeval (AER) One can register disapproval with a growl or an insult that is rather cheap, but often effective. 30 rounds: – 1 -10 Standard public goods game – 11-20 Either Monetary (F&G) or Nonmonetary punishment – 21-30 21 30 Back to the standard public goods game Sequence of 30 games not revealed—Surprise restarts each time Implementing the Non-monetary Punishment: Intrinsic rewards: • • • Small changes in incentive alters the frame and changes the contract Extrinsic motivation may crowd out the intrinsic motivation Example: p Blood donation. – Should we provide monetary incentives to provide blood? – What is the effect on supply? Titmuss (1970) – The Gift Relationship • • Blood donation – Argued that monetary compensation for donating blood might crowd out the supply of blood donors – Contrasted the American practice where recipients paid for bl d some off which blood, hi h was purchased h d from f donors, d with ith B British iti h practice, where blood was freely given to patients and received from altruistic donors. – Argued that blood purchased from American donors was less safe and more likely to spread hepatitis among its recipients – The American practice of selling blood abandoned not long after p the book's publication. Why do we donate whole blood and pay for plasma? Crowding out intrinsic incentives • • Mellstrom and Johannesson (JEEA, 2008): – prospective female blood donors indeed respond negatively to a monetary incentive, whereas the behavior of potential male donors is largely unaffected – Warning against the dangers of employing market mechanisms in administering social services Once a commodity y always y a commodityy Image, Status • • • Image as an incentive : In experimental studies we strive for anonymity – presumably because we think these effects can be very strong Concern for what others think as a driver for p pro-social behavior Effect of Image on Giving • Motives for giving – Intrinsic (e.g., altruism, warm glow) – Extrinsic (e.g., tax breaks, thank-you gestures) – Image Motivation (social approval approval, status) • Many campaigns provide token gifts that allow donors to signal their contributions – LIVESTRONG campaign, – mugs and calendars as thank-you gifts, – walks, concerts, – advertise list of donors Social Approval (Image, status) • • Do we care what others think – Dana, Cain, Dawes Are we influenced by others observing us? – Rege and Telle – Anderoni and Petrie – Ariely, Ai l B Bracha, h and dM Meier i – Bracha, Heffetz, and Vesterlund Do we care what others think? • Dana, Cain, and Dawes. 2006. “What You Don’t Know Won’t Hurt Me: Costly (But Quiet) Exit in Dictator Games.” Organizational Behavior and Human Decision Processes 100, 193-201. – Do you give because of altruism, or is it fulfilling some socially dictated norm or expectation? – Argue that at least some giving occurs because the dictator does not want to appear selfish, even to an anonymous receiver who cannot punish the dictator. – Posit that many dictators are motivated to give what they think receivers expect them to give (Appeal to models of psychological games of Geanakoplos, Pearce, & Stacchetti, 1989) Study 1 • • Use a $10 Dictator Game with an exit option. This exit option allowed the dictator to accept $9 to end the experiment without the receiver getting any money or learning about the foregone Dictator Game. Methods – 80 participants (40 Dictators) – Random assignment g to roles – Study 1 administered silently following an unrelated task in which all participants filled out a series of surveys and were paid $10. – Because study 1 was unannounced and participants were already in the room completing another task, the dictator could exit without the would-be receiver suspecting that a dictator game was to have taken p g place. Study 1 • • • • Participants were seated apart in a large room. Stage 1: The dictator’s got instruction for both D and R, asked to divide $10, and told that both D and R instructions would be forwarded to R once the allocation decision had been made, even if the dictator gave nothing. Stage 2: After D’s decisions, but before transfer of instructions to R, Ds were given an Exit option: Take $9 now rather than the DG allocation, and we’ll never tell the R what happened. By revealed preference, no one should take the exit option it is strictly within the budget set.....assuming the two situations have the same “context” that shapes preferences. Study 1 Results – 11 of 40 D’s took the exit option – 2 of these had chosen to take $10 in the DG – Exit decision has little to do with DG choice. Why? • Why Exit? – Main Hypothesis: People care about the expectations of recipients. – Alternatives Hypotheses: yp • Escape the burden of responsibility or avoid conflict (but that should yield negative correlation) • Exit option changes the choice set, set and ss ss’s s are showing preference over choice sets. (Should be correlated with choice in the DG?) • Exiting may be a type of experimenter demand effect effect. Would be consistent with no correlation. Study 2 • • • • • Stage 1: Dictators told they will divide $10 with a Recipient who will not be told why they received any money. Stage 2: Dictators then given the same exit decision. In stage g 1 there are no expectations p in the minds of recipients, p , thus nothing to care about except their welfare or fairness. Exit in this game cannot be due to the Main Hypothesis (social image), g ), but would be consistent with alternatives (escape ( p responsibility, changing choice set, experimenter demand) Methods: 45 dictators 21 replicate Study 1, 24 do the “Private Game” ((Studyy 2)) Conclusions • • • When given the choice over decision sets, some subjects choose to forgo the $10 Dictator Game and choose $9 exit payment. This must mean that exiting is better than facing the morally difficult problem of the dictator game, and living with the knowledge that player 2 is forming an opinion of you. Indicates – that dictators may y give g without any y true concern for the receiver’s welfare – that people care about what strangers think of them. Charitable Giving (revisited) • • • Giving to achieve status – c = own consumption – d = donation recipient's consumption – e = earning (budget constraint: c + d = e) Models: – Selfish: u = u (c) => d=0 – Social S i l preference: f u = u (c; ( d) – Social signaling, social status, social pressure, social punishment, etc.: u = u (c; s), where s = social rewards/punishments (positive or negative) e.g., status, respect, sanctions – General “social" form: u = u (c; d; s) If s matters then we should behave very differently when observed Rege and Telle (JPubE 2003) • • Question: are contributions in the VCM sensitive to social image and framing Procedure: – one p person at a time is asked to come up p to a box – receives $150 and two envelopes, ‘group envelope’ and ‘personal envelope’. Walks behind a private screen. Divides the 150 kroner between the two envelopes, p , and seals them. Place both in one large envelope and brings back to his seat. – When all of the participants have been through procedure, one person at a time steps p p forward to the box to return the g group p envelope. The sum of the money in the group-envelopes is then calculated. This sum multiplied by two, and divided equally between all 10 participants. In addition to this money, each participant receives the money he puts in his personal envelope. • Treatments: • no-approval-treatment: return of envelope anonymous – donation added total amount written on board approval-treatment: one person at a time has to come up to the box with his sealed group envelope. In sight of all of the participants he then opens his envelope envelope, counts the amount of money in the envelope, writes the sum on the blackboard, and puts the money into the box. This procedure ensures revelation of each participant’s choice and identity identity, thus making indirect social approval and disapproval possible • Framing • • associative-treatment: 10 subjects = ‘community’, box = ‘the community box’, money in the box said to belong to the community. Strategy choice: free-rider or cooperate non-associative-treatment: 10 subjects = ‘participants in the experiment’. box =‘the box’, money in the box is said to belong to the participants in the experiment. strategy choice: take money from the box, or not to take money from the box. Conclusion • • Approval increases giving substantially Contradictory to Gaechter and Fehr (1999): – social approval at the end of a 10-period public good game by revealing g the identity y and the contributions of each subject, j , and then making subjects discuss their contributions with each other. – common knowledge in period 1 that such a revelation of identities and contributions will occur after p period 10. – Find: introduction of social approval incentives does not lead to a significant increase in the contribution level among strangers. – Perhaps different: • experimenter (rather than individual) reveals participant’s identity and contribution to the public good • Perhaps limited focus on revelation for 10 periods Andreoni and Petrie (JPubE 2004) • • • • • Fund-raisers announce the names and amounts of givers. How does it work and does it promote efficiency? Experiment: Reveal identity without revealing names 5 people per group, group paired for 8 rounds rounds, MPCR 0 0.5. 5 Paired with 4 different groups of 5 for a total of 40 rounds. Treatments: – No Pictures No Amounts – Pictures No Amounts – No Pictures Amounts – Pictures Amounts – Category Reporting (0-14,15+), with Pictures – Option p to g give Anonymously y y anonymous • • Result 1: Only when both pictures and amounts are shown is there a significant effect – (rules out the argument that difference between RT and GF is caused by the way giving announced) Result 2: With Anonymity optional – No one chooses to give anonymously – But these people give significantly more than others anyway anyway. – Raised the most giving of any treatment Result 3: Categories With categories t i 0 0-14, 14 15 15-20, 20 people l move tto th the llower end d off th the categories Note • • Indeed, some of the sensitivity to attention appears to be instinctive: – Haley and Fessler (2005, Evolution and Human Behavior) document that a set of painted eyes induces more generous behavior in a dictator game experiment experiment. – Bateson, Nettle, and Roberts (2006, Biology Letters) similarly document that, compared to a control image, an image of a pair of eyes almost tripled the contributions to an honesty box used to collect money for drinks in a university coffee room. Why do we respond to others watching? – Trying to signal image? Bernabou and Tirole (AER 2006) Image Motivation • • • • Ariely, Bracha, and Meier (AER 2009) Hypotheses (u = u (c; d; s)) – Image motivation is influenced by visibility – Intrinsic and extrinsic motivation are not influence by visibility Experiments: – Click for charity (lab) – Bike Bik for f charity h it (field) (fi ld) Give more to good charity more when public, provided no extrinsic motivation. Click for Charity • • • • • • Participants: 161 Princeton undergraduates Task: Participants click on two keys (XZ) on the keyboard for up to 5 min. For each XZ click, we donate on their behalf to the assigned Charity. The more they click, the higher is the donation. Donation: 1 cent donated for each of the first 200 pairs of X-Z presses, 0.5 cents for each of the next 200 pairs, 0.25 cents for each of the next 200 pairs, . . . , and 0.01 cents for each pair above 1,200. Cause: Red Cross: uncontroversial good cause, National Rifle Association (NRA): controversial Private vs. public condition (Private: Anonymous. Public: After task, Ss stands up, informs others about her charity, whether she got a private incentive, and the amount she donated) Private Incentive: as donation in addition get same return to self Findings • • Good cause: – Subjects exerted more effort in public – Extrinsic motivation reduces the image signal in the public condition – crowds out the image g thus reduce effort with incentives (not caused by upper bound) – Instead see incentives increase performance in private – Consistent with the image motivation of Bernabou and Tirole (AER 2006) Caltech – volunteering study – Can volunteer at any time – one treatment randomly selects some to leave Status revisited • • • • Previous studies examine homogenous environment where the only possibility of separation (positive image, high status) is to give more When status is exogenous saw earlier (Kumru and Vesterlund) that it may influence giving when making sequential contribution – high status lead, low status follow What happens when we donate simultaneously and status varies by participants? – Do we continue to see participants setting themselves apart through high contributions when donation observed? – Does high g status obligate g to g give? Conspicuous Compassion or Conspicuous Production? Charitable Donations in the Lab (Bracha, Heffetz, and Vesterlund) Two Kinds of Status • • Exogenous status: – based on factors that are exogenous to the choice situation e.g., status based on ancestry, race, gender, but also on past performance/income/effort/success – could affect behavior through internalized norms, preference change – if status and income are substitutes,, could affect behavior through an income effect (see, e.g., Ellingsen and Johannesson's survey “Paying Respect," JEP (2007); also see model below) Endogenous status: – based on choice behavior itself e.g., status via Spence-type signaling g g (conspicuous ( p compassion): p ) signaling g gg generosity, y, income, etc. Experiment Design • • • General design: – Subjects (strangers) put in a group of six (3 facing 3) – privately perform a math task – notified of their performance relative to the group group, and get earning based on relative performance: • e = $35 if among top three • e = $15 if not – make donation d = $0, $5, $10, . . . to an anonymous child in need, keep the rest (c = e - d) R l off the Rules th game are common knowledge k l d iin allll ttreatments. t t Experimental treatments: informational conditions (2 X 2) – Earning either visible or non-visible to rest of group – Donation either visible or non-visible to rest of group Predictions • • • • Standard model: u (c): – d = 0, independent of treatment Social preferences: u (c; d): – d>0 0, independent of treatment With exogenous status: u (c; d; s): – Assumption: s depends on relative performance/earning d > 0, independent of donation-visibility, donation visibility but may depend on earning earningvisibility condition With endogenous status: u (c; d; s): – Assumption: A ti s may d depend d on d donation ti b behavior h i and d on relative l ti performance/earning d > 0, may depend on both earningvisibility and donation-visibility conditions – How H and d when h would ld you signal i l hi high h status? t t ? Findings Findings • • • • d > 0 for most subjects (especially at e = $35) Average donation 24% of earning, for both e = $35 and $15, across visibility conditions Limited evidence that g giving gp particularly y high g for high g income when income not visible and donation is. Donation visibility? Donation Visible Income visible Conclusion • • Overall, cannot reject that donation-visibility condition does not affect donation (Unlike Rege and Telle, and Andreoni and Petrie) – Why? Income-visibility y increases contribution for high, g , decreases it for low – Why? Conclusion • • Overall, cannot reject that donation-visibility condition does not affect donation (Unlike Rege and Telle, and Andreoni and Petrie) – Why? Income-visibility y increases contribution for high, g , decreases it for low – Why? • findings support exogenous status explanation. • A very simple stylized model that could explain our results: • u = (1-a) log (c + s) + a log (d) – As if the initial status eliminates need to establish status
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