Essays on Incentives and Effort

Abstract

Incentives motivate economic agents to exert effort in producing outcomes, and the way governments, firms, and educators structure incentive schemes can influence the amount of effort exerted by these agents. This collection of essays examines various factors affecting such effort decisions. Chapter 1 investigates the role of academic competition in student effort decisions. I develop a tournament model to describe how an increase in the size of a particular schooling cohort in Hong Kong can motivate better students to "step up" effort exertion, but discourage less-able students. I use test score data from Hong Kong to empirically test these predictions. While Chapter 1 involves a natural experiment, Chapter 2 examines how changes in tournament structure (the winning cutoff and prize amount) in a laboratory experiment can influence effort decisions. Generating data in a controlled experimental setting where participants are asked to compete with one another in memorization tasks, I find that effort is positively correlated with prize amount, and that only low-performing participants are effort-responsive to movements in the winning cutoff. Moving from tournament incentive schemes to piece-rate incentive schemes, Chapter 3 re-examines an experiment conducted by Fehr and Goette (2007) in which the wage rate of Zurich bicycle messengers is increased for a short period of time. Fehr and Goette use a reference dependent preferences model to explain patterns in effort response. To explain their findings without appealing to behavioral mechanisms, I build a two-step non-time-separable neoclassical model with uncertainty resulting from limited work availability. I conduct additional analyses with their data to argue my case for the neoclassical model. The findings of these three essays suggest that the way incentive schemes are structured does matter in motivating agents to exert effort.