The Impact of Formal Incentives on Teams: Micro-Evidence From Retail

Abstract

While the impact of formal incentives on individuals is well understood, their impact on teams is less clear. A handful of field experiments document a small or null impact of incentives on teams. However, these studies do not contrast their results with the impact of incentives on individuals, and thus, cannot rule out the possibility that the null/small results on teams are due to incentives being ineffective on individuals to begin with (for example, due to organizational culture). In this paper we perform a full comparison: we estimate the impact of incentives both on individuals and on teams, within the same setting. Concurring with the extant literature, we observe that incentives on individuals generate approximately a 20% productivity increase, but that such a gain disappears in teams. Exploiting the details of our setting, and guided by a formal model, we show that this is not because incentives do not work in teams, but because teams in our setting do not need them. This is because: i) effort complementarities strongly counteract free-riding in teams (so incentives do work), and ii) teams without incentives display larger social incentives than teams with them (and this asymmetry is large enough so that teams without incentives catch-up with those with incentives). We conclude that, under plausible conditions, having only an estimate of the impact of incentives on teams, without having an estimate for individuals, one cannot say much about the presence and magnitude of the generic mechanisms of free-riding, effort complementarity and social incentives.