The Effects of Incentive Structure Designs on Whether and Where Individuals Search

Abstract

The design of incentive structures affects individual search behavior both in an experimental (Ederer & Manso, 2013) and real life (Lee & Meyer-Doyle, 2017) context. Previous research on this particular topic has only focused on one aspect of search, which is where individuals search, ignoring the crucial first step in the two-step search process, which is whether individuals search (Billinger et al., 2020). This study integrates both steps of the search process and investigates how three different incentive structure designs first affect whether and then where individuals search. An experiment with a total of 343 participants is conducted, where all participants individually played a computerized problem-solving game built up around a NK landscape. Results show that incentive structure designs do significantly affect whether individuals search. An incentive structure design rewarding maximum performance leads to most searches followed by a design that relies only on a fixed payment and after that by a design rewarding average performance. Regarding where individuals search, we find clear evidence to conclude that a fixed payment design leads to significantly more exploratory search than a design rewarding average performance. The article contributes to the search literature by challenging and questioning previous results on the topic. This is done by showing that the theoretical predictions about where individuals search are not as clear as previously shown in the literature when one includes the important first step in the search process.