Abstract
We study the effects on performance of incentives framed as gains or losses, as well as the effort channels through which individuals increase performance. We also explore potential spill-over effects on a non-incentivised activity. Subjects participated in a medically framed real-effort task under one of the three contracts, varying the type of performance incentive received: (1) no incentive; (2) incentive framed as a gain; or (3) incentive framed as a loss. We find that performance improved similarly with incentives framed as losses or gains. However, individuals increase performance differently under the two frames: potential losses increase participants’ performance through a greater attention (fewer mistakes), while bonuses increase the time spent on the rewarded activity. There is no spill-over effect, either negative or positive, on the non-incentivised activity. We discuss the meaning and implications of our results for the design of performance contracts.
Highlights
Contracts that link remuneration to the achievement of performance targets are widely used to align the interests of employers and workers in both the private sector (Lazear, 2000) and the public sector (Burgess & Ratto, 2003)
We explore the direct and indirect effects of incentives on performance and effort channels in a real effort task, under two types of contracts: one that rewards workers’ good performance and another that penalises them for poor performance
About 20% more correct entries are made under performance contracts: compared to the 96.9 entries in the control treatment, participants made 117.8 correct entries in the loss treatment (p = 0.008 two-sided Mann–Whitney U-Test, hereafter MW test), and 116.6 in the gain treatment (p = 0.023 MW test)
Summary
Contracts that link remuneration to the achievement of performance targets are widely used to align the interests of employers and workers in both the private sector (Lazear, 2000) and the public sector (Burgess & Ratto, 2003). Incentives can change the intensity of effort, or the extent to which workers apply their cognitive resources (i.e. attention or focus exerted to minimise mistakes or increase efficiency, or both). Incentives may affect the persistence of effort, which is the time workers spend on a given task. If higher performance is achieved through a change in the direction or persistence of effort i.e. individuals engage more in the incentivised activity or spend more time on it, performance in non-incentivised activities is likely to decline due to the automatic reduction in the time available (Holmstrom & Milgrom, 1991). If incentives change attentional processes (i.e. the intensity of effort), Kahneman (1973)’s work on attention research suggests that this could increase the overall attentional resource pool available to workers, leading to positive spill-overs on a non-incentivised task (Yechiam & Hochman, 2013b)
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