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

Esteban Klor (), Sebastian Kube, Eyal Winter () and Ro'i Zultan ()

Journal of Economic Behavior & Organization, 2014, vol. 97, issue C, 72-83

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.

Keywords: Incentives; Incentive reversal; Team production; Externalities; Laboratory experiments; Personnel economics (search for similar items in EconPapers)
JEL-codes: C92 D23 J31 J33 J41 M12 M52 (search for similar items in EconPapers)
Date: 2014
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Working Paper: CAN HIGHER REWARDS LEAD TO LESS EFFORT? INCENTIVE REVERSAL IN TEAMS (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:97:y:2014:i:c:p:72-83

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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