Incentivizing Quantity and Quality of Output: An Experimental Investigation of the Quantity-Quality Trade-off

Rubin, Jared and Samek, Anya and Sheremeta, Roman (2016): Incentivizing Quantity and Quality of Output: An Experimental Investigation of the Quantity-Quality Trade-off.

Abstract

Firms face an optimization problem that requires a maximal quantity output given a quality constraint. How firms should incentivize quantity and quality to meet these dual goals remains an open question, potentially due to limitations of field data. We provide a theoretical model and conduct an experiment in which participants are paid for both quantity and quality of a real effort task. Consistent with the theoretical predictions, higher quality incentives encourage participants to shift their attention from quantity to quality, and higher quality incentives reduce inefficient decision-making. We also observe behavioral components in responsiveness to the quality incentive.

• Item Type: MPRA Paper
• Language: English
• Keywords: quantity, quality, experiment, incentives, real effort, loss aversion
• Subjects: D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J31 - Wage Level and Structure ; Wage Differentials; J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Labor Contracts

References

Al‐Ubaydli, O., Andersen, S., Gneezy, U., & List, J.A. (2015). Carrots that look like sticks: Toward an understanding of multitasking incentive schemes. Southern Economic Journal, 81, 538-561.

Baker, G.P. (1992). Incentive Contracts and Performance Measurement. Journal of Political Economy, 100, 598-614.

Bowles, S. (2009). When economic incentives backfire. Harvard Business Review, 87, 22-23.

Bowles, S., & Polania-Reyes, S. (2012). Economic incentives and social preferences: Substitutes or complements? Journal of Economic Literature, 50, 368-425.

Bracha, A., & Fershtman, C. (2013). Competitive incentives: Working harder or working smarter? Management Science, 59, 771-781.

Cason, T.N., Masters, W.A., & Sheremeta, R.M. (2010). Entry into winner-take-all and proportional-prize contests: An experimental study. Journal of Public Economics, 94, 604-611.

Charness, G., & Grieco, D. (2014). Creativity and financial incentives. Working Paper.

Copeland, A., & Monnet, C. (2009). The welfare effects of incentive schemes. Review of Economic Studies, 76, 93-113.

Dickinson, D., & Villeval, M.C. (2008). Does monitoring decrease work effort? The complementarity between agency and crowding-out theories. Games and Economic Behavior, 63, 56-76.

Ederer, F.P., & Manso, G. (2013). Is pay-for-performance detrimental to innovation? Management Science, 59, 1496-1513.

Eriksson, T., Poulsen, A., & Villeval, M.C. (2009). Feedback and incentives: Experimental evidence. Labour Economics, 16, 679-688.

Falk, A., & Kosfeld, M. (2006). The hidden costs of control. American Economic Review, 96, 1611-1630.

Fehr, E. and Rockenbach, B. (2003). Detrimental effects of sanctions on human altruism. Nature, 422, 137-140.

Fischbacher, U. (2007). z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, 10, 171-178.

Frey, B.S. (1993). Does monitoring increase work effort? The rivalry with trust and loyalty. Economic Inquiry, 31, 663–670.

Gneezy, U., & List, J.A. (2006). Putting behavioral economics to work: Testing for gift exchange in labor markets using field experiments. Econometrica, 74, 1365-1384.

Gneezy, U., & Rustichini, A. (2000a). A fine is a price. The Journal of Legal Studies, 29, 1-17.

Gneezy, U., & Rustichini, A. (2000b). Pay enough or don’t pay at all. Quarterly Journal of Economics, 115, 791-810.

Gneezy, U., Meier, S., &. Rey-Biel, P. (2011). When and why incentives (don't) work to modify behavior. Journal of Economic Perspectives, 25, 191-209.

Gneezy, U., Niederle, M., & Rustichini, A. (2003). Performance in competitive environments: Gender differences. Quarterly Journal of Economics, 118, 1049-1074.

Godager, G., Henning-Schmidt, H., & Iversen, T. (2016). Does performance disclosure influence physicians’ medical decisions? An experimental analysis. Journal of Economic Behavior and Organization, forthcoming.

Griffith, T.L. (1993). Monitoring and performance: A comparison of computer and supervisor monitoring. Journal of Applied Social Psychology, 23, 549-572.

Haigh, M.S., & List, J.A. (2005). Do professional traders exhibit myopic loss aversion? An experimental analysis. Journal of Finance, 60, 523-534.

Hennig-Schmidt, H., Selten, R., & Wiesen, D. (2011). How payment systems affect physicians’ provision behavior – An experimental investigation. Journal of Health Economics, 30, 637-646.

Holmstrom, B., & Milgrom, P. (1991). Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design. Journal of Law, Economics, & Organization, 7, 24-52.

Hossain, T., & List, J.A. (2012). The behavioralist visits the factory: Increasing productivity using simple framing manipulations. Management Science, 58, 2151-2167.

Johnson, R.M., Reiley, D.H., & Muñoz, J.C. (2015). “The war for the fare”: How driver compensation affects bus system performance. Economic Inquiry, 53, 1401-1419.

Laffont, J.J., & Martimort, D. (2009). The theory of incentives: The principal-agent model. Princeton University Press.

Lazear, E.P. (2000). Performance pay and productivity. American Economic Review, 90, 1346-1361.

Mellstrom, C., & Johannesson, M. (2008). Crowding out in blood donation: Was Titmuss right? Journal of the European Economic Association, 6, 845–863.

Mauboussin, M.J. (2012). The success equation: Untangling skill and luck in business, sports, and investing. Harvard Business Press.

Nalbantian, H.R., & Schotter, A. (1997). Productivity under group incentives: An experimental study. American Economic Review, 87, 314-341.

Niederle, M., & Vesterlund, L. (2007). Do women shy away from competition? Do men compete too much? Quarterly Journal of Economics, 122, 1067-1101.

Paarsch, H.J., & Shearer, B. (2000). Piece rates, fixed wages, and incentive effects: Statistical evidence from payroll records. International Economic Review, 41, 59-92.

Rietz, T., Schniter, E., Sheremeta, R.M., & Shields, T.W. (2013). Trust, reciprocity and rules. Working Paper.

Shearer, B. (2004). Piece rates, fixed wages and incentives: Evidence from a field experiment. Review of Economic Studies, 71, 513-534.

Shupp, R., Sheremeta, R.M., Schmidt, D., & Walker, J. (2013). Resource allocation contests: Experimental evidence. Journal of Economic Psychology, 39, 257-267.

Syverson, C. (2011). What Determines Productivity? Journal of Economic Literature, 49, 326-365.

Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. Quarterly Journal of Economics, 106, 1039-1061.