Abstract
I study the effect of task difficulty on workers’ effort. I find that task difficulty has an inverse-U effect on effort and that this effect is quantitatively large, especially when compared to the effect of conditional monetary rewards. Difficulty acts as a mediator of monetary rewards: conditional rewards are most effective at the intermediate or high levels of difficulty. The inverse-U pattern of effort response to difficulty is inconsistent with many popular models in the literature, including the Expected Utility models with the additively separable cost of effort. I propose an alternative mechanism for the observed behavior based on non-linear probability weighting. I structurally estimate the proposed model and find that it successfully captures the behavioral patterns observed in the data. I discuss the implications of my findings for the design of optimal incentive schemes for workers and for the models of effort provision.
Highlights
Labor economics has long recognized the role of monetary incentives in determining workers’ effort (Lazear 2018)
Research in labor economics has traditionally focused on monetary rewards as the primary incentive tool for principals to incentivize agents
Research in behavioral economics shows that monetary rewards are subject to psychological factors and that alternative behavioral incentives are relevant for building incentive schemes for agents
Summary
Labor economics has long recognized the role of monetary incentives in determining workers’ effort (Lazear 2018). Behavioral economics added new insights to the effect of these conditional rewards by showing that their effectiveness is subject to psychological factors, such as crowding out of intrinsic motivation (Gneezy and Rustichini 2000) and choking-under-pressure (Ariely et al 2009; Hickman and Metz 2015).. Behavioral economics added new insights to the effect of these conditional rewards by showing that their effectiveness is subject to psychological factors, such as crowding out of intrinsic motivation (Gneezy and Rustichini 2000) and choking-under-pressure (Ariely et al 2009; Hickman and Metz 2015).1 This literature discovered alternative incentive mechanisms, often inspired by studies in psychology, that can boost workers’ effort at no extra monetary cost. A recent World Bank Report highlights behavioral mechanisms as an important incentive tool in developing countries (World Bank Group 2015)
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