Incentive magnitude and reference point shifting: a laboratory experiment

Abstract

PurposeThis paper analyzes how different dynamics of changes in piece-rate incentives affect individuals' exerted effort.Design/methodology/approachThe authors constructed an across-subjects three-period laboratory setting where, for each period, they exogenously manipulate the amount of piece-rate incentive paid for correct answer. The same experimental conditions were separately applied to two different laboratory tasks, one boring and the other entertaining.FindingsIt was found that performance contingent incentives affect participants' effort provision, while the effect is task dependent and it is much stronger for the boring task. Moreover, a unique increase in the amount of piece rate between periods leads to an increase in performance only for the boring task. A decrease in piece rate incentive between periods negatively affects subjects' performance on both tasks, but only provided that the decrease follows a previous increase.Originality/valueThe paper is the first to study the effect of a sequence of changes in the amount of piece rate incentives on individual effort provided. Our main result highlights the relevance of the order in which the sequence of changes in piece-rate incentive occurs. Results could be useful for the designing of performance rewards in organizations.