This paper is a critical reflection on the use of monetary incentives in economic experiments. The argument is that incentives have their effect through their influence on one or more of three fact...
The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework
We review 74 experiments with no, low, or high performance-based financial incentives. The modal result has no effect on mean performance (though variance is usually reduced by higher payment). Higher incentive does improve performance often, typically judgment tasks that are responsive to better effort. Incentives also reduce “presentation” effects (e.g., generosity and risk-seeking). Incentive effects are comparable to effects of other variables, particularly “cognitive capital” and task “production” demands, and interact with those variables, so a narrow-minded focus on incentives alone is misguided. We also note that no replicated study has made rationality violations disappear purely by raising incentives.
Pay Enough or Don't Pay at All*
Abstract. Economists usually assume that monetary incentives improve performance, and psychologists claim that the opposite may happen. We present and disc
How Field Experiments in Economics Can Complement Psychological Research on Judgment Biases
This review summarizes results of field experiments examining individual behaviors across several market settings—from open-air markets to rideshare markets to tax-compliance markets—where people sort themselves into market roles wherein they make consequential decisions. Using three distinct examples from my own research on the endowment effect, left-digit bias, and omission bias, I showcase how field experiments can help researchers understand mediators, heterogeneity, and causal moderation involved in judgment biases in the field. In this manner, the review highlights that economic field experiments can serve an invaluable intellectual role alongside traditional laboratory research.
Integrative experiments identify how punishment affects welfare in public goods games
Despite decades of research, the conditions under which punishment promotes cooperation remain unclear. Through an integrative experiment varying 14 design parameters of public goods games across 360 experimental conditions (147,618 decisions from 7100 participants), we reveal substantial heterogeneity in punishment effectiveness: Its impact on welfare ranges from 43% improvement to 44% reduction depending on the game parameters. To characterize these patterns, we developed models that outperformed human forecasters in predicting punishment effectiveness in new experiments. Communication emerges as the most important factor, followed by contribution framing (opt out versus opt in), contribution type (variable versus all-or-nothing), game length, and outcome visibility, though these factors often interact. The results reframe the debate from whether punishment works to when it does, demonstrating how integrative experiments enable discovery of generalizable patterns in social phenomena. , Editor’s summary People face conflicts between maximizing personal gain versus supporting collective interests. If we cooperatively recycle or donate to charities, it benefits society, but it also costs us time and resources that could be selfishly preserved for ourselves. We impose penalties to deter those undesirable or selfish behaviors, but under what conditions do punishments or penalties effectively modify behavior to benefit group welfare? Alsobay et al . systematically and simultaneously varied 14 factors together instead of in isolation. Punishment was unequivocally most effective when paired with consistent communication, particularly over time. Another effective factor was “opting out” or withdrawing some, but not all, endowments already in the public fund. These methodological advances revealed when, rather than whether, punishment works. —Ekeoma Uzogara , INTRODUCTION Human societies face many situations where individual and collective interests conflict, often referred to as social dilemmas. Costly peer punishment has been studied for more than 25 years in public goods games (stylized behavioral experiments in which individuals decide how much to contribute to a shared pool that benefits everyone) as a mechanism to promote cooperation. Prior research has identified many contextual factors that moderate punishment’s effectiveness, including game length, communication, group size, punishment cost, and so on. However, the specific conditions under which punishment improves group welfare remain unclear. RATIONALE We argue that this lack of clarity derives from the dominant experimental paradigm, in which any given study manipulates only one or a few theoretically informed factors. Because such studies differ in many ways (different experimental procedures, populations), their results are often difficult to compare or integrate. Consequently, one can list many factors that have some effect, but cannot say how much each matters relative to the others, or how they work together, and as a result, cannot predict when punishment will help or harm welfare in new settings. To address this fundamental knowledge gap, we use an integrative experimental design and systematically vary 14 parameters across 360 conditions (147,618 decisions from 7100 participants) to elucidate when punishment improves versus undermines welfare in public goods games, which factors matter most, and how they interact. RESULTS The effect of punishment on welfare ranged from 43% improvement to 44% reduction depending on the specific combination of game parameters. To characterize this heterogeneity, we trained a model that outperformed all 553 human forecasters (laypeople and experts) in predicting whether punishment would help or harm welfare in new experiments. Communication emerged as roughly three times more important than any other factor, followed by contribution framing (opt in versus opt out), contribution type (variable versus all-or-nothing), game length, and peer outcome visibility (whether participants can see others’ earnings). These factors often interact. For example, longer games enhance punishment’s effectiveness only when communication is available, and contribution framing effects depend on both contribution type and outcome visibility. CONCLUSION Many phenomena in social science are shaped by many factors whose interactions are consequential, yet the dominant experimental paradigm often limits its inquiry to “does a given effect exist?” and examines hypothesized factors in isolation. As a result, research programs can accumulate many partial explanations without a clear picture of how they combine to determine outcomes across settings. Knowing that factors matter individually is fundamentally different from knowing how much each matters and how they interact. The integrative approach implemented here offers one way forward. It varies many factors simultaneously within a shared design space, evaluates models by their predictive accuracy on new experiments, and probes those models to constrain and develop theory. Our hope is that integrative experiment designs, combined with models that integrate prediction and explanation, represent a path toward more cumulative social science. Integrative experiment reveals when punishment helps versus harms. We systematically varied 14 design parameters across 360 experimental conditions. The effect of punishment on cooperation efficiency ranged from −44% to +43% depending on the specific game parameters. Communication emerged as three times more important than any other factor, followed by contribution framing, contribution type, and game length.
The Effect of Payment Transparency on Consumption: Quasi-Experiments from the Field
Recent research suggests that the method of making a payment can influence the willingness to pay and consumption behavior. In this manuscript, we argue that payment mechanisms differ from each other along the dimensions of transparency, and that the degree of transparency correlates positively with the pain of paying using the mechanism, and negatively with consumption and spending. We replicate previous experimental results using quasi-experiments from the field, and find that the lower the payment transparency, the greater is the consumption. However, this effect is weak for products whose consumption rates are inflexible.
Small Probabilistic Discounts Stimulate Spending: Pain of Paying in Price Promotions
AbstractWe find that small probabilistic price promotions effectively stimulate demand, even more so than comparable fixed price promotions (e.g., “1% chance it’s free” vs. “1% off,” respectively), because they more effectively reduce the pain of paying. In three field experiments at a grocer, we exogenously and endogenously manipulated the salience of pain of paying via elicitation timing (e.g., at entrance or checkout) and payment method (i.e., cash/debit cards or credit cards). This modulated the attractiveness of probabilistic discounts and their ability to stimulate spending. Shoppers paying with cash or debit cards, for example, spent 54% more if they received a 1% probabilistic discount than a 1% fixed discount (experiment 2). A fourth experiment showed that consumers’ sensitivity to pain of paying modulates the greater comparative efficacy of small probabilistic than fixed discounts. More broadly, the results elucidate a novel affective route through which price promotions stimulate demand––pain of paying.
The High Cost of Not Doing Experiments - Behavioral Scientist
We can pay dearly, in blood, treasure, and well-being, for experiments that aren’t done. -Richard Nisbett, Mindware
Prosocial Compliance in P2P Lending: A Natural Field Experiment
We implement behavioral mechanisms in a natural field experiment to increase loan repayment rates on a peer-to-peer (P2P) lending website. The results show that text message reminders that convey lenders’ positive expectations considerably increase the likelihood that borrowers will repay their loans, whereas reminders emphasizing the adverse consequences of failure to repay loans do not have enduring effects. Our experiment results in an increase in loan repayments in the sample period. In addition, our reminders are cost-free to implement, showing the potential importance of such interventions in enhancing prosocial compliance in P2P lending. This paper was accepted by John List, behavioral economics.
Open Source, Incentives, and Why 'Monetize Later' Often Backfires
How misaligned incentives undermine open source projects — and why 'monetize later' often leads to the very restrictions open source was meant to avoid.
Mechanism Experiments and Policy Evaluations
Randomized controlled trials are increasingly used to evaluate policies. How can we make these experiments as useful as possible for policy purposes? We argue greater use should be made of experiments that identify the behavioral mechanisms that are central to clearly specified policy questions, what we call "mechanism experiments." These types of experiments can be of great policy value even if the intervention that is tested (or its setting) does not correspond exactly to any realistic policy option.
You’ve Got Mail: A Randomized Field Experiment on Tax Evasion
We report from a large-scale randomized field experiment conducted on a unique sample of more than 15,000 taxpayers in Norway who were likely to have misreported their foreign income. By randomly manipulating a letter from the tax authorities, we cleanly identify that moral suasion and the perceived detection probability play a crucial role in shaping taxpayer behavior. The moral letter mainly works on the intensive margin, while the detection letter has a strong effect on the extensive margin. We further show that only the detection letter has long-term effects on tax compliance. This paper was accepted by Yan Chen, behavioral economics.
Moral Incentives in Credit Card Debt Repayment: Evidence from a Field Experiment
We study the role of morality in debt repayment, using an experiment with the credit card customers of a large Islamic bank in Indonesia. In our main treatment, clients receive a text message stating that “non-repayment of debts by someone who is able to repay is an injustice.” This moral appeal decreases delinquency by 4.4 percentage points from a baseline of 66 percent and reduces default among customers with the highest ex ante credit risk. Additional treatments help benchmark the effects against direct financial incentives and rule out competing explanations, such as reminder effects, priming religion, and provision of new information.
Payment Rewards and Credit Card Debt: Experimental Evidence
We report on a controlled laboratory experiment in which participants make consumption, saving, and credit card repayment decisions when credit card purchases e
Handbook of Labor Economics
What new tools and models are enriching labor economics?Developments in Research Methods and their Application, Volume 4A summarizes recent advances in the ways economists study wages, employment, and labor markets. Mixing conceptual models and empirical work, contributors cover subjects as diverse as field and laboratory experiments, program evaluation, and behavioral models. The combinations of these improved empirical findings with new models reveal how labor economists are developing new and innovative ways to measure key parameters and test important hypotheses. - Investigates recent advances in methods and models used in labor economics - Demonstrates what these new tools and techniques can accomplish - Documents how conceptual models and empirical work explain important practical issues
Putting nudges in perspective
Conventional economic policy focuses on ‘economic’ solutions (e.g. taxes, incentives, regulation) to problems caused by market-level factors such as externalities, misaligned incentives and information asymmetries. By contrast, ‘nudges’ provide behavioural solutions to problems that have generally been assumed to originate from limitations in human decision making, such as present bias. While policy-makers have good reason for exploiting the power of nudges, we argue that these extremes leave open a large space of policy options that have received less attention in the academic literature. First, there is no reason that solution and problem need have the same theoretical basis: there are promising behavioural solutions to problems that have causes that are well explained by traditional economics, and conventional economic solutions often offer the best line of attack on problems of behavioural origin. Second, there is a wide range of hybrid policy actions with both economic and behavioural components (e.g. framing a tax or incentive in a specific way), and there exist many societal problems – perhaps the majority – that arise from both economic and behavioural factors (e.g. firms’ exploitation of consumers’ behavioural biases). This paper aims to remind policy-makers that behavioural economics can influence policy in a variety of ways, of which nudges are the most prominent but not necessarily the most powerful.
