Technology, team production and incentives

Abstract

Incentive reversal (IR) is when higher rewards induce some agents to reduce their effort (Winter 2009). We show that IR can hold for all agents when: there is an improvement in production technology; and rewards are based on team output. Whilst IR requires at least one worker’s marginal return to be decreasing in team productivity when agents invest simultaneously, this is not necessary with sequential investments. Rather, IR can occur with sequential investment when the marginal return of effort for all agents is increasing with improvements in technology.