Psychological Foundations of Incentives

During the last two decades economists have made much progress in understanding incentives, contracts and organisations. Yet, they constrained their attention to a very narrow and empirically questionable view of human motivation. The purpose of this paper is to show that this narrow view of human motivation may severely limit understanding the determinants and effects of incentives. Economists may fail to understand the levels and the changes in behaviour if they neglect motives like the desire to reciprocate or the desire to avoid social disapproval. We show that monetary incentives may backfire and reduce the performance of agents or their compliance with rules. In addition, these motives may generate very powerful incentives themselves.incentives, contracts, reciprocity, social approval, social norms, intrinsic motivation.

Appropriating the Commons A Theoretical Explanation

In this paper we show that a simple model of fairness preferences explains major experimental regularities of common pool resource (CPR) experiments. The evidence indicates that in standard CPR games without communication and without sanctioning possibilities inefficient excess appropriation is the rule. However, when communication or informal sanctions are available appropriation behavior is more efficient. Our analysis shows that these regularities arise naturally when a fraction of the subjects exhibits reciprocal preferences.Common pool resources, experiments, fairness, reciprocity, game theory, fairness models

Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device

When unemployment prevails, relations with a particular firm are valuable for workers. As a consequence, a worker may adhere to an implicit agreement to provide high effort, even when performance is not third-party enforceable. But can implicit agreements – or relational contracts – also motivate high worker performance when the labor market is tight? We examine this question by implementing an experimental market in which there is an excess demand for labor and the performance of workers is not third-party enforceable. We show that relational contracts emerge in which firms reward performing workers with wages that exceed the going market rate. This motivates workers to provide high effort, even though they could shirk and switch firms. Our results thus suggest that unemployment is not a necessary device to motivate workers. We also discuss how market conditions affect relational contracting by comparing identical labor markets with excess supply and excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor compared to a market characterized by unemployment. Surprisingly though, this does not compromise market performance.relational contracts, involuntary unemployment

Self-Reinforcing Market Dominance

Are initial competitive advantages self-reinforcing, so that markets exhibit an endogenous tendency to be dominated by only a few firms? Although this question is of great economic importance, no systematic empirical study has yet addressed it. Therefore, we examine experimentally whether firms with an initial cost advantage are more likely to invest in cost reductions than firms with higher initial costs. Wefind that the initial competitive advantages are indeed self-reinforcing, but subjects in the role of firms overinvest relative to the Nash equilibrium. However, the pattern of overinvestment even strengthens the tendency towards self-reinforcing cost advantages relative to the theoretical prediction. Further, as predicted by the Nash equilibrium, aggregate investment is not affected by the initial efficiency distribution. Finally, investment spillovers reduce investment, and investment is higher than the joint-profit maximizing benchmark for the case without spillovers and lower for the case with spillovers.Cost-reducing Investment, Asymmetric Oligopoly, Increasing Dominance, Experimental Study

Bronchoscopic Lung Volume Reduction

The application of lung volume reduction surgery in clinical practice is limited by high postoperative morbidity and stringent selection criteria. This has been the impetus for the development of bronchoscopic approaches to lung volume reduction. A range of different techniques such as endobronchial blockers, airway bypass, endobronchial valves, thermal vapor ablation, biological sealants, and airway implants have been employed on both homogeneous as well as heterogeneous emphysema. The currently available data on efficacy of bronchoscopic lung volume reduction are not conclusive and subjective benefit in dyspnoea scores is a more frequent finding than improvements on spirometry or exercise tolerance. Safety data are more promising with rare procedure-related mortality, few serious complications, and short hospital length of stay. The field of bronchoscopic lung volume reduction continues to evolve as ongoing prospective randomized trials build on earlier feasibility data to clarify the true efficacy of such techniques

Community Based Tourism in Arslanbob and Sary-Moghul, Kyrgyzstan: An Alternative to Labour-Migration?

This research studies the perceptions of Community Based Tourism (CBT) workers towards labour-migration in the two mountainous southern Kyrgyz villages of Sary Moghul and Arslanbob. The qualitative data collected through semi-structured interviews from 28 CBT workers and four key stakeholders reveal four Ideal Types of labour-migration amongst the CBT workers: i) CBT workers who wish to labour-migrate but have yet to have done so; ii) CBT workers who have labour-migrated and returned; iii) CBT workers who are circulatory labour-migrants; and finally iv) CBT workers who have never labour-migrated and currently have no motivation to do so. Qualitative analysis reveals participants from Ideal Type 1 migrating for sociocultural factors, whereas Ideal Types 2 and 3 labour-migrate due to economic factors. Ideal Type 4, a group predominantly composed of individuals with no interest in labour-migration reveals both social and economic factors as the determinants of labour-migration. It is found that in general CBTs have dis-incentivised labour-migration for all the Ideal Types with the exception of Type 4 which by definition does not seek labour- migration. Ideal Type 2 perceives CBTs dis-incentivising labour-migration both socially as well as economically, whereas Ideal Types 1 and 3 perceive the CBTs as dis-incentivising labour-migration purely socially

Fairness Perceptions and Reservation Wages—the Behavioral Effects of Minimum Wage Laws

In a laboratory experiment we show that minimum wages have significant and lasting effects on subjects' reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects' reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity to pay less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people's behavior by shaping the perception of what is a fair transaction and by creating entitlement effect

Performance Pay and Multidimensional Sorting - Productivity, Preferences and Gender

This paper studies the impact of incentives on worker self-selection in a controlled laboratory experiment. Subjects face the choice between a fixed and a variable payment scheme. Depending on the treatment, the variable payment is a piece rate, a tournament or a revenue-sharing scheme. We find that output is higher in the variable pay schemes (piece rate, tournament, and revenue sharing) compared to the fixed payment scheme. This difference is largely driven by productivity sorting. In addition personal attitudes such as willingness to take risks and relative self-assessment as well as gender affect the sorting decision in a systematic way. Moreover, self-reported effort is significantly higher in all variable pay conditions than in the fixed wage condition. Our lab findings are supported by an additional analysis using data from a large and representative sample. In sum, our findings underline the importance of multi-dimensional sorting, i.e., the tendency for different incentive schemes to systematically attract people with different individual characteristics

Competition and Relational Contracts: The Role of Unemployment as a Disciplinary Device

When unemployment prevails, relations with a particular firm are valuable for workers. As a consequence, a worker may adhere to an implicit agreement to provide high effort, even when performance is no third-party enforceable. But can implicit agreements - or relational contracts - also motivate high worker performance when the labor market is tight? We examine this question by implementing an experimental market in which there is an excess demand for labor and the performance of workers is not third-party enforceable. We show that relational contracts emerge in which firms reward performing workers with wages that exceed the going market rate. This motivates workers to provide high effort, even though they could shirk and switch firms. Our results thus suggest that unemployment is not a necessary device to motivate workers. We also discuss how market conditions affect relational contracting by comparing identical labor markets with excess supply and excess demand for labor. Long-term relationships turn out to be less frequent when there is excess demand for labor compared to a market characterized by unemployment. Surprisingly though, this does not compromise market performance.relational contracts, involuntary unemployment

Wage Rigidity in a Competitive Incomplete Contract Market

Do employers and workers underbid prevailing wages if there is unemployment? Do employers take advantage of workers’ underbidding by lowering wages? We hypothesize that under conditions of incomplete labor contracts wage levels may positively affect workers’ propensity to cooperate. This, in turn, may prevent firms from underbidding or accepting the underbidding of workers. To get controlled evidence we conducted several experimental double auction markets. Double auctions are well known for their striking competitive properties. Our data show, however, the following regularities: (i) Workers’ underbidding is very frequent but employers refuse to accept workers’ low wage offers in markets with incomplete labor contracts. However, in the presence of complete labor contracts employers accept and actively enforce wages close to the competitive level. (ii) Workers’ effort is positively related to the wage level. Therefore, wage cutting is costly for the employer if workers have discretion over their effort level. This holds true even in the presence of explicit performance incentives. In markets with incomplete contracts firms’ high wage strategy increases the gains from trade and renders both workers and firms better off.Wage Rigidity, Competitive Incomplete Contract Market