Can Higher Bonuses Lead to Less Effort? Incentive Reversal in Teams

32 Pages Posted: 21 Feb 2011

See all articles by Esteban F. Klor

Esteban F. Klor

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Sebastian Kube

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; University of Bonn

Eyal Winter

Hebrew University of Jerusalem - Department of Economics

Ro'i Zultan

Ben-Gurion University of the Negev

Abstract

Conventional wisdom suggests that an increase in monetary incentives should induce agents to exert higher effort. In this paper, however, 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: an increase in monetary incentives (either because rewards increase or effort costs decrease) may lead agents to exert lower effort in the completion of a joint task - even if agents are fully rational, self-centered money maximizers. Herein we discuss this seemingly paradoxical phenomenon and report on two experiments that provide supportive evidence.

Keywords: incentives, incentive reversal, team production, externalities, laboratory experiments, personnel economics

JEL Classification: C92, D23, J31, J33, J41, M12, M52

Suggested Citation

Klor, Esteban F. and Kube, Sebastian and Winter, Eyal and Zultan, Ro'i, Can Higher Bonuses Lead to Less Effort? Incentive Reversal in Teams. IZA Discussion Paper No. 5501. Available at SSRN: https://ssrn.com/abstract=1765667

Esteban F. Klor (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel
+972 2 588 3143 (Phone)
+972 2 581 6071 (Fax)

HOME PAGE: http://economics.huji.ac.il/facultye/klor/klor.htm

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Sebastian Kube

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

University of Bonn

BWL 1
Adenauerallee 24-42
Bonn, D-53012
Germany

Eyal Winter

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel
+972 2 658 4154 (Phone)
+972 2 651 3681 (Fax)

HOME PAGE: http://www.ma.huji.ac.il/%7Emseyal/

Ro'i Zultan

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

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