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Performance Incentives and the Dynamics of Voluntary Cooperation

Explore how explicit incentives impact voluntary cooperation in employment, investigating crowding-out effects and framing influences in a unified framework using experimental games. The study examines if monetary incentives affect voluntary cooperation and the possibility of re-establishing it post-incentive pay. Insights are sought into the interplay of framing effects (bonus vs. fine) and repeated game effects, considering trust and compatibility of incentives.

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Performance Incentives and the Dynamics of Voluntary Cooperation

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  1. Performance Incentives and the Dynamics of Voluntary Cooperation Simon Gächter (University of Nottingham) Esther Kessler (University College London) Manfred Königstein (University of Erfurt)

  2. Motivation • Many employment contracts are incomplete • “Voluntary cooperation” of the agent is important: • “Managers claim that workers have so many opportunities to take advantage of employers that it is not wise to depend on coercion and financial incentives alone as motivators” (Bewley, 1999) • “work morale”, “creativity”, “loyalty”, “initiative”, “Good will”, etc. (Williamson 1985; Simon 1997; Bewley 1999) • “Organizational citizenship behaviour” (Organ 1988) • Explicit performance incentives quite popular

  3. A simple model: adapted from Fehr, Kirchsteiger & Riedl (QJE 1993) Participants are randomly assigned to the roles of “employer” and “worker”, respectively. 1. Employer: 2. Worker: 3. Payoffs realised – Accept/reject offer– Choose costly effort [1, 2, …, 20] Wage offer [0,700] Motivation (2) • Incomplete contract, because effort not specified • Worker payoffs: w – c(e) (costs increasing in effort) • Employer payoffs: ve – w (revenues increasing in effort)

  4. Motivation (3) Fehr, Kirchsteiger & Riedl (QJE 1993):  There is reciprocity-based voluntary cooperation

  5. Motivation (4) • Starting ideas for our experimental study: • Do explicit incentives crowd out voluntary cooperation? • Can voluntary cooperation be re-established after experiencing incentive pay? • Since we know from other experiments that framing of incentives and repeated game effects are also potentially relevant for behavior, these should be studied as well

  6. Motivation (5) • We investigate in a unified framework: • 1. Existence of voluntary cooperation • 2. Effectiveness of monetary incentives • 3. Crowding out effects • 4. Framing effects (Bonus vs Fine) • 5. Repeated game effects

  7. Experimental Game • Principal-agent game: • Principal offers work contract • Agent can accept or reject • Agent chooses effort • Contract and effort determine payoffs

  8. Experimental Game (2) w  [-700, 700] ê  [1, 20] b{0,24,52,80} w [-700, 700] ê  [1, 20] - w  [-700, 700] ê  [1, 20] f {0,24,52,80} 35e – w 35e–w if e≥ê 35e–w+f if e<ê 35e–w–b if e≥ê 35e–w if e<ê w – c(e) w –c(e) if e≥ê w –c(e)–f if e<ê w –c(e)+b if e≥ê w –c(e) if e<ê Effort cost: c(e) = 7e – 7 Payoff if contract rejected: 0 for both

  9. Standard Theoretical Predictions • Trust Contract: • e = 1 (minimal effort) • Fine Contract, Bonus Contract: • e = ê if fine is sufficiently large: f  c(ê)(“incentive compatibility”) • Otherwise, e = 1 • Equivalent for bonus (framing of incentives) • Higher fine/bonus induces higher effort: f ,b  {0, 24, 52, 80} enforceable effort levels: {1, 4, 8, 12} • limited possibility for sanctions/rewards

  10. A Comprehensive Experimental Design (1) Random matching in each period to minimize strategic effects

  11. A Comprehensive Experimental Design (2)

  12. Procedures • Experiments at the University of St. Gallen • Computerised, z-Tree (Fischbacher 1999) • 456 participants • CHF 45 (€30) for 1.5 – 2 hours

  13. Results

  14. Voluntary cooperation exists and is stable over time Period 1-10 Period 11-20 Period 21-30

  15. Higher incentives induce higher effort • 68% of all contracts are incentive compatible • Most principals (about 90%) choose maximal fine, bonus

  16. TRUST Partner vs. Stranger FINE Partner vs. Stranger BONUS Partner vs. Stranger

  17. Results From These Graphs • Trust contracts can induce high effort (“trust-and-reciprocity” is an important mechanism) • Monetary incentives are effective • Repeated interaction has strong effect • Framing (Bonus vs Fine)? • Crowding out of voluntary cooperation?

  18. How to proceed? • Evaluate these effects within a unifying statistical model • Convincing structural model? • Effort is bounded below and above  Tobit-Regression • But, take a look at the distribution of data again

  19. Distribution of effort conditional on wage Period 1-10 Period 11-20 Period 21-30 Two groups of data: • e=1 independent of fixed wage • e>1 positively correlated with fixed wage

  20. Robustness of Data Pattern TFT TTT-Partner FT BT TFT-Partner TBT-Partner TBT

  21. How to proceed? •  Hurdle Model 1. Estimate p = prob(e>1) 2. Estimate ê = f(x|e>1) For Step 2 use Tobit with upper bound 20 • But, take another look at the distribution of data

  22. Distribution of effort conditional on best reply effort Three groups of data: • e=1 independent of best reply effort • e=e* • other choices

  23. Robustness of Data Pattern TFT (left), TBT (right) TFT-Partner (left), TBT-Partner (right)

  24. How to proceed? •  Double Hurdle Model 1. Estimate p = prob(e>1) 2. Estimate q = prob(e=e*|e>1) 3. Estimate ê = f(x|e>1 and e≠e*) For Step 3 use Tobit with upper bound 20

  25. Can trust contracts do better than incentive contracts? • Applying this structure we evaluate effectiveness of trust contracts, monetary incentives, repeated game, framing, crowding out • Important question: Can trust contracts perform better than incentive contracts (cet. par.)? • We need to compare trust contracts with equally expensive incentive contracts; i.e., holding total compensation constant • Use estimates of p, q and ê to determine expected effort for payoff-equivalent contracts

  26. Yes! Trust contracts can do better than incentive contracts Data: FT, BT, only incentive compatible contracts

  27. Robustness: 3-Phases-Data Stranger Data: TFT, TBT, only incentive compatible contracts

  28. Robustness: 3-Phases-Data Partner Data: TFT-Partner, TBT-Partner, only incentive compatible contracts

  29. Summary • Trust contracts and monetary incentives are both effective in inducing effort • We find substantial crowding out of voluntary cooperation due to incentives; if the contract is incentive compatible most subjects exactly choose rational effort • Trust contracts may be more beneficial for a principal than an incentive compatible contract with bonus or fine • Other results: Repeated game important, framing relatively unimportant • Interestingly, non-incentive compatible contracts perform relatively well (further analyses needed)

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