Can higher rewards lead to less effort? Incentive reversal in teams

Esteban F. Klor, Sebastian Kube, Eyal Winter, Ro'i Zultan

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

Conventional wisdom suggests that a global increase in monetary rewards should induce agents to exert higher effort. In this paper we demonstrate that this may not hold in team settings. In the context of sequential team production with positive externalities between agents, incentive reversal might occur, i.e., an increase in monetary rewards (either because bonuses increase or effort costs decrease) may induce agents that are fully rational, self-centered money maximizers to exert lower effort in the completion of a joint task. Incentive reversal happens when increasing one agent's individual rewards alters her best-response function and, as a result, removes other agents' incentives to exert effort as their contributions are no longer required to incentivize the first agent. Herein we discuss this seemingly paradoxical phenomenon and report on two experiments that provide supportive evidence.

Original languageEnglish
Pages (from-to)72-83
Number of pages12
JournalJournal of Economic Behavior and Organization
Volume97
DOIs
StatePublished - 1 Jan 2014

Keywords

  • Externalities
  • Incentive reversal
  • Incentives
  • Laboratory experiments
  • Personnel economics
  • Team production

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