Monetary Rewards and Decision Cost in Experimental Economics

Vernon Smith and James Marvin Walker

Economic Inquiry, 1993, vol. 31, issue 2, pages 245-61

Abstract: A survey of thirty-one experimental studies that report data on the comparative effects of monetary rewards and opportunity cost shows (1) several studies in which increased reward s shift the central tendency of the data toward the predictions of rational models; and (2) in virtually all cases rewards reduce the variance of the data around the predicted outcome. This is consistent with a model in which rewards are balanced against decision cost in agent behavior and explicates the argument that when rational models fail it can be attributed to low opportunity cost of deviations from the rational prediction. Copyright 1993 by Oxford University Press.

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