“Incentive Complexity, Bounded Rationality and Effort Provision,” David Huffman, U Pittsburgh

BEHAVIORAL SCIENCES WORKSHOP

Abstract: This paper shows that dynamic incentives to reduce effort, embedded in a prevalent class of workplace incentive scheme, can be a shrouded attribute due to complexity and worker bounded rationality. Field experiments in a firm find a weak response to dynamic incentives, although a structural model predicts a strong response if workers understood, and reduced form analysis rules out many explanations. Online real-effort experiments with the workers also show a weak response, and the controlled setting makes shrouding the most plausible explanation. Simplifying the scheme, or with high cognitive ability, a response emerges, implicating complexity and bounded rationality as mechanisms. Understanding online also predicts responding in field experiments. Additional experiments with AMT workers shed light on determinants of complexity. The paper (i) demonstrates that complexity affects effort provision and may allow firms to achieve better than second-best; (ii) shows that incentive effects can depend on cognitive ability; (iii) sheds light on mechanisms underlying complexity; and (iv) offers guidance for incentive design. (The paper is not yet available for circulation.)

David Huffman is a Professor of Economics at University of Pittsburgh, with a Ph.D. in economics from University of California, Berkeley. Professor Huffman’s research lies at the intersections of behavioral economics, labor economics, and personnel economics. One strand of his research is basic research on the determinants of human decision making, especially preferences regarding risk, time, and social interactions, as well as trust and motivated beliefs. The other strand of his research is more applied, bringing insights from behavioral economics to central questions in labor and personnel economics, such as how workers respond to incentives, and what determines the functioning of relational contracts in different institutional environments. He uses a variety of methodologies, including field experiments within firms and organizations, laboratory experiments, surveys, and analysis of personnel data.

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Cosponsored by the Center for the Study of American Politics (CSAP) and the School of Management’s International Center for Finance and the Lynne & Andrew Redleaf Foundation.