Give Me a Challenge or Give Me a Raise

60 Pages Posted: 21 Sep 2019 Last revised: 17 Jan 2020

See all articles by Aleksandr Alekseev

Aleksandr Alekseev

Chapman University - Economic Science Institute

Date Written: January 16, 2020

Abstract

I study the effect of task difficulty on workers’ effort. I find that task difficulty has an inverse-U effect on effort and that this effect is quantitatively large, especially when compared to the effect of conditional monetary rewards. Difficulty acts as a mediator of monetary rewards: conditional rewards are most effective at the intermediate or high levels of difficulty. The inverse-U pattern of effort response to difficulty is inconsistent with many popular models in the literature, including the Expected Utility models with the additively separable cost of effort. I propose an alternative mechanism for the observed behavior based on non-linear probability weighting. I structurally estimate the proposed model and find that it successfully captures the behavioral patterns observed in the data. I discuss the implications of my findings for the design of optimal incentive schemes for workers and for the models of effort provision.

Keywords: incentives, task difficulty, monetary rewards, effort provision, risk preferences, probability weighting

JEL Classification: C91, D91, D81, J20, J33

Suggested Citation

Alekseev, Aleksandr, Give Me a Challenge or Give Me a Raise (January 16, 2020). Available at SSRN: https://ssrn.com/abstract=3449468 or http://dx.doi.org/10.2139/ssrn.3449468

Aleksandr Alekseev (Contact Author)

Chapman University - Economic Science Institute ( email )

One University Dr.
Orange, CA 92866
United States

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