Effort Choices Research Articles

Project selection and execution in teams

We use a mechanism‐design approach to study a team whose members select a joint project and exert individual efforts to execute it. Members have private information about the qualities of alternative projects. Information sharing is obstructed by a trade‐off between adaptation and motivation. We determine the conditions under which first‐best project and effort choices are implementable and show that these conditions can become relaxed as the team grows in size. We also characterize the second‐best mechanism and find that it may include a “motivational bias,” that is, a bias in favor of the team's initially preferred project, and higher‐than‐optimal effort by uninformed team members.

Does Managerial Compensation Affect Workers' Effort?

We explore in a two-level gift-exchange experiment whether the managerial compensation influences workers' effort decisions. Firstly, we find that there exists a strong positive relation between own wage and effort levels for the workers, while the managers' effort reaches a maximum for intermediate wages and decreases for very high wages. Secondly, our data suggests that the managerial compensations are significantly negatively correlated with the workers' effort choices: the higher the manager's wage, the lower the effort level chosen by the workers.

Teams with moral hazard and non-verifiable quality assessment

This paper shows that buying from a team of sellers can be optimal for the buyer in a static model where the buyer has private information about quality, sellers have private information about the cost and choice of effort, and quality is not contractible.

Secretion of dengue virus envelope protein ectodomain from mammalian cells is dependent on domain II serotype and affects the immune response upon DNA vaccination.

Dengue virus (DENV) is currently among the most important human pathogens and affects millions of people throughout the tropical and subtropical regions of the world. Although it has been a World Health Organization priority for several years, there is still no efficient vaccine available to prevent infection. The envelope glycoprotein (E), exposed on the surface on infective viral particles, is the main target of neutralizing antibodies. For this reason it has been used as the antigen of choice for vaccine development efforts. Here we show a detailed analysis of factors involved in the expression, secretion and folding of E ectodomain from all four DENV serotypes in mammalian cells, and how this affects their ability to induce neutralizing antibody responses in DNA-vaccinated mice. Proper folding of E domain II (DII) is essential for efficient E ectodomain secretion, with DIII playing a significant role in stabilizing soluble dimers. We also show that the level of protein secreted from transfected cells determines the strength and efficiency of antibody responses in the context of DNA vaccination and should be considered a pivotal feature for the development of E-based DNA vaccines against DENV.

Me vs. We: The Effect of Incomplete Team Member Feedback on Cooperation of Self-Regarding Individuals

We examine the effect that feedback of team member contributions to team production has on individuals’ subsequent contributions to team production, specifically for self-regarding individuals (proselfs). Prior literature outlines the adverse effects of free riding, a behavior in which self-regarding individuals often engage. We evaluate how proselfs respond differentially to the type of feedback about team member contributions; input (i.e., time contributed) compared to output (i.e., production units contributed), and whether feedback type can mitigate free riding. We predict that when proselfs view low team member contributions, they will respond more negatively following input feedback than output feedback. Input feedback can provide a stronger signal of effort choice, so low input feedback will be interpreted as intentional. Further, we predict that proselfs’ positive responses will be lower following input feedback, as proselfs are more likely to interpret input feedback in a self-serving manner, which tempers their positive responses. We provide experimental evidence that following input feedback, proselfs respond more negatively to low team contributions and less positively to high team contributions. These responses to input feedback adversely affect team performance. Our findings outline that providing output feedback has the potential to mitigate proselfs’ free riding.

The incentive effects of missions—Evidence from experiments with NGO employees and students

This paper studies the incentive effects of an organization׳s ‘mission’ on the effort provision of agents. Across treatments, I exogenously vary how much the agents׳ and their projects׳ missions match. In the first study, NGO employees are assigned the role of agents in an online, one-shot, principal-agent experiment. In the second study, I replicate the experimental design with a student subject pool. In both experiments the agents׳ effort choices are, for any given piece rate, increasing in their mission match. In a third study, a laboratory experiment with a finitely repeated principal-agent game with random matching, I do not find a motivational effect of missions, unlike in my first two studies.

Disentangling Social Capital: Lab-in-The-Field Evidence on Coordination, Networks and Cooperation

Although social capital has been considered of the utmost importance for development and poverty alleviation by governments and NGOs, it remains a complex and elusive concept. Different dimensions of social capital form part of the puzzle: cooperation is an individual other-regarding preference; social norms stem from beliefs about others’ behavior; and individual connections arising in networks allow us to build such beliefs.To disentangle social capital we conducted an artefactual field experiment at the inset of a Conditional Cash Transfer program in an urban context within a developing country. The first challenge is to disentangle the cooperation element from the coordination one. To our knowledge this is the first time this is achieved; we do so by conducting a minimum effort coordination game with Pareto ranked equilibria. Willingness to cooperate is teased out using a public goods game. By controlling for the density of network information we capture the role of connections, which is the third element of the mixture. We contrast our findings with traditional survey measures of social capital we also gather such as voting behavior, trust and membership in associations.Our identification strategy allows us to assess whether exposure to the program could help individuals to overcome strategic uncertainty and achieve the most efficient equilibrium in the coordination game. We provide experimental evidence on the positive role of a monetary incentive on the existence of a social norm that allows individuals to overcome a coordination failure. We rule out confounding factors as individual socio-economic characteristics, social capital accumulation, willingness to cooperate and connectivity.The effort choice is given by how connected the individual is and other members’ socio-economic characteristics. We estimate a structural choice model of the individual decision to coordinate, which highlights the role of beliefs about others’ behavior: high effort is only sustained under high beliefs. The regressions suggest that the CCT program helps overcome the coordination failure through different channels, and the structural model points to the beliefs channel.

Fair Wages and Effort Provision: Combining Evidence from a Choice Experiment and a Field Experiment

The presence of workers who reciprocate higher wages with greater effort can have important consequences for firms and labor markets. Knowledge about the extent and determinants of reciprocal effort choices is, however, incomplete. We investigate the role of fairness perceptions and social preferences in a field experiment in which workers were hired for a one-time job. We show that workers who perceive being underpaid at the base wage increase their performance if the hourly wage increases, whereas those who feel adequately paid or overpaid at the base wage do not change their performance. Moreover, we find that only the workers who display reciprocity in a choice experiment show reciprocal effort responses in the field. The workers who lack reciprocity in the choice experiment do not respond to the wage increase, even if they feel underpaid at the base wage. Our findings suggest that fairness perceptions and social preferences are key in workers' performance response to wage increases. In our study, the wage increase affects effort mainly through the removal of perceived unfairness, i.e., the elimination of negative reciprocity toward the firm, rather than positive reciprocity. These results are the first direct evidence of the fair-wage effort hypothesis in the field and also help interpret previous contradictory findings in the literature. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1970 . This paper was accepted by Uri Gneezy, behavioral economics.

Merit pay and wage compression with productivity differences and uncertainty

This paper experimentally investigates wage setting and effort choices in a multi-worker setting when there is heterogeneity in worker productivity and managers’ perception of this productivity is imperfect. Worker ability is assigned via an aptitude test and, in an innovative design, manager uncertainty concerning this ability is related to the manager's own test performance. We propose a merit-pay hypothesis, that higher-ability workers will reduce their effort if they are not paid more than coworkers with lower ability, but not vice versa. Based on a simple model, we also predict that the higher the uncertainty about employee ability levels, the more managers compress wages between perceived high- and low-ability workers. We find strong experimental support for both hypotheses.

Dynamic Business Share Allocation in a Supply Chain with Competing Suppliers

This paper studies a repeated game between a manufacturer and two competing suppliers with imperfect monitoring. We present a principal-agent model for managing long-term supplier relationships using a unique form of measurement and incentive scheme. We measure a supplier's overall performance with a rating equivalent to its continuation utility (the expected total discounted utility of its future payoffs), and incentivize supplier effort with larger allocations of future business. We obtain the vector of the two suppliers' ratings as the state of a Markov decision process, and solve an infinite horizon contracting problem in which the manufacturer allocates business volume between the two suppliers and updates their ratings dynamically based on their current ratings and the current performance outcome.Our contributions are both theoretical and managerial: We propose a repeated principal-agent model with a novel incentive scheme to tackle a common, but challenging incentive problem in a multi-period supply chain setting. Assuming binary effort choices and performance outcomes by the suppliers, we characterize the structure of the optimal contract through a novel fixed-point analysis. Our results provide a theoretical foundation for the emergence of business-as-usual (low effort) trapping states and tournament competition (high effort) recurrent states as the long-run incentive drivers for motivating critical suppliers.

Tournaments and Project Selection Under Ambiguity

This paper analyzes how ambiguity affects the tournament outcome and the project selection of a multi-business-unit organization. We consider a tournament model where business unit managers compete against each other for a promotion reward but are ambiguous about how relatively well their skills match with the project assigned by a headquarter (HQ). We show that while ambiguity adversely affects business unit managers' effort choices, project risk can partly offset the adverse effect of ambiguity and hence boost effort inputs from business unit managers. This is in sharp contrast with the standard tournament theory, predicting that greater risk reduces contestants' incentives to exert effort. Moreover, the equilibrium prize spread is shown to decrease with ambiguity and increase with project risk. Finally, while greater project risk is unequivocally suboptimal for the organization in the absence of ambiguity, it can be optimal for the organization in the presence of ambiguity. Our results thus highlight an unexplored bright side of risk-taking of organizations and provide novel policy implications for project management under ambiguity. The robustness of our results is also probed from several different perspectives.

The Strategic Effects of Auditing Standard No. 5 in a Multi-Location Setting

SUMMARY Auditing Standard No. (AS) 5 provides guidance in the required audit of internal control over financial reporting and its integration into the financial statement audit. AS 5 advocates a “top-down” approach, in which control testing helps the auditor assess the risk of financial misstatement across multiple locations. We consider a manager who oversees two locations and who has private information about internal control strength in each location. Only when controls are weak can the manager commit fraud. We show how the manager's opportunity to commit fraud and informational characteristics of internal control tests impact the manager's probability choice of fraud and the auditor's choice of substantive test effort.

Me vs. We: The Effect of Incomplete Team Member Feedback on Cooperation of Self-Regarding Individuals

We examine the effect that feedback of team member contributions to team production has on individuals’ subsequent contributions to team production, specifically for self-regarding individuals (proselfs). Prior literature outlines the adverse effects of free riding, a behavior in which self-regarding individuals often engage. We evaluate how proselfs respond differentially to the type of feedback about team member contributions; input (i.e., time contributed) compared to output (i.e., production units contributed), and whether feedback type can mitigate free riding. We predict that when proselfs view low team member contributions, they will respond more negatively following input feedback than output feedback. Input feedback can provide a stronger signal of effort choice, so low input feedback will be interpreted as intentional. Further, we predict that proselfs’ positive responses will be lower following input feedback, as proselfs are more likely to interpret input feedback in a self-serving manner, which tempers their positive responses. We provide experimental evidence that following input feedback, proselfs respond more negatively to low team contributions and less positively to high team contributions. These responses to input feedback adversely affect team performance. Our findings outline that providing output feedback has the potential to mitigate proselfs’ free riding.

Online Reviews and Collaborative Service Provision: A Signal-Jamming Model

We study the provision of collaborative services under online reviews, where the service outcome depends on the effort of both the service provider and the client. The provider decides not only her own effort but also the client's, at least to some extent. The client gives the review based on his net utility upon service completion. We develop a signal-jamming model in which the provider's inherent capability or type is unobservable, and the market infers the provider type through observable signals such as the service outcome, the client review, or both. We show that compared to the benchmark case when the service outcome is observed as a signal, the client review generally leads to less effort of both the provider and the client. The review hence tends to sacrifice the service outcome in favor of the efficiency of the client's effort input. Nevertheless, when clients incorporate private information about the provider type into their reviews, service providers are better motivated to devote effort. Interestingly, we find the provider's effort choices may be either strategic complements or substitutes. With a reasonable level of informativeness, online reviews could lead to favorable performance in service effectiveness, client effort efficiency, and provider type distinguishability. Surprisingly, we demonstrate that when both the review and the outcome are available, the provider may lack sufficient incentive to devote effort, resulting in inferior distinguishability of provider types. It thus illustrates that richer information may not necessarily generate favorable strategic outcomes.

Competing with Co-Created Products

The practice of firms co-creating products and services with their customers has a long history in business markets and, with advances in information technology, is now gaining increasing popularity in consumer markets as well. In this research we study the incentives of competing firms to co-create. We analyze the strategic choices of two competing downstream firms who simultaneously decide whether or not to co-create with an upstream supplier. Within this framework we incorporate, (1) endogenous pricing and effort choice by the upstream supplier and (2) endogenous pricing and effort choices by the downstream firms. Firms contemplating co-creation with a supplier are faced with a trade-off. On the one hand they can benefit from the supplier’s innovation efforts and therefore obtain a better product than they themselves could produce. On the other hand, they are confronted with the adverse effect of their own innovation efforts spilling over to their rivals via the supplier who would sell the co-created products to all firms. Our model captures this tension and offers several insights.First, we show that, when firms compete in the end-consumer market, the supplier can exert lower innovation effort when it co-creates with more firms. This result complements the existing literature that shows that, without competition between firms, a supplier is always better off and exerts more effort when it co-creates with more firms.Second, we show that in the co-creation environment, ex-ante symmetric firms may pursue asymmetric strategies in equilibrium. The asymmetric equilibrium, in which only one of the two firms co-creates with the supplier, is obtained when the degree of competition between the firms is moderate.Third, we find two types of asymmetric equilibria. For moderately low degrees of competition between firms, all parties prefer the asymmetric outcome. For moderately high degrees of competition, both firms prefer co-creation, but the supplier will refuse to co-create with one of them thereby enforcing the asymmetric outcome. Thus, a strategic supplier’s role is critical in that it expands the region where the asymmetric equilibrium obtains, beyond that preferred by the firms themselves.Finally, and counterintuitively, a higher degree of product fit for the rival can actually benefit the co-creating firm in the asymmetric outcome, even though it improves its rival’s product.

Alliance Formation in Contests with Incomplete Information

This paper studies a contest in which players with unobservable types may form an alliance in a pre-stage of the game to join their forces and compete for a prize. We characterize the pure strategy equilibria of this game of incomplete information. We show that if the formation of an alliance is voluntary, players do not reveal private information in the process of alliance formation in any equilibrium. In this case there exists a pooling equilibrium without alliances with a unique effort choice in the contest and there exist equilibria in which all types prefer to form an alliance. If the formation of an alliance can be enforced by one player with positive probability there exists an equilibrium in which only the low types prefer to form an alliance.

Elections and Divisiveness: Theory and Evidence

We analyze the effort allocation choices of incumbent politicians when voters are uncertain about politician preferences. There is a pervasive incentive to posture'' by over-providing effort to pursue divisive policies, even if all voters would strictly prefer to have a consensus policy implemented. As such, the desire of politicians to convince voters that their preferences are aligned with the majority of the electorate can lead them to choose strictly pareto dominated effort allocations. Transparency over the politicians' effort choices can either mitigate or re-enforce the distortions depending on the strength of politicians' office motivation and the capacity for the holder of the office in question to effect change. When re-election concerns are paramount transparency about effort choices can be bad for both incentivizing politicians to exert effort on socially efficient tasks and for allowing voters to select congruent politicians. We take our theoretical results to the data with an empirical analysis of how U.S. Congressmen allocate time across issues. Consistent with the theory, we find evidence of political posturing due to elections (among U.S. Senators) and due to higher transparency (among U.S. House Members).

The Impact of a Multiple Listing Service

This article offers a theoretical investigation of the impact of a multiple listing service (MLS) and its optimal size. We study a principal‐agent model of real estate brokerage with multiple agents, where the entry of new agents imposes externalities on the other agents. We solve simultaneously for the equilibrium and socially efficient levels of agents’ effort choices, the size of the MLS and the commission rate. Introducing an MLS reduces the number of agents, increases agents’ effort levels and improves total surplus. Current commission rates of 5–7% appear much higher than the competitive commission rate, leading to too many agents, too much effort by agents and a lower overall surplus. We also find that giving a greater portion of the commission to the selling agent increases effort levels, reduces the number of agents and improves total surplus.

Managerial Hedging Under Self-Esteem

Motivated by psychological evidence that self-esteem plays an important role in individual decision-making, this paper studies how self-esteem concerns influence a manager's effort choice and hedging behavior and how a board designs the managerial compensation in response. We show that when the manager has stronger self-esteem concerns, it requires higher managerial ownership to induce effort. In equilibrium, the manager's net hedging position increases with the strength of the manager's self-esteem concerns. Each of managerial hedging and self-esteem concerns added to an otherwise standard agency model increases the equilibrium pay-performance sensitivity. The agency cost increases as the manager's self-esteem concerns become stronger, but the manager's access to hedging opportunities itself does not change the agency cost. We also discuss how our basic model can be extended to account for circumstances under which managerial hedging can affect firm value.

Unraveling in a repeated moral hazard model with multiple agents

This paper studies an infinite-horizon repeated moral hazard problem where a single principal employs several agents. We assume that the principal cannot observe the agents’ effort choices; however, agents can observe each other and can be contractually required to make observation reports to the principal. Observation reports, if truthful, can serve as a monitoring instrument to discipline the agents. However, reports are cheap talk so that it is also possible for agents to collude, i.e., where they shirk, earn rents, and report otherwise to the principal. The main result of the paper constructs a class of collusion-proof contracts with two properties. First, equilibrium payoffs to both the principal and the agents approach their first-best benchmarks as the discount factor tends to unity. These payoff bounds apply to all subgame perfect equilibria in the game induced by the contract. Second, while equilibria themselves depend on the discount factor, the contract that induces these equilibria is independent of the discount factor.