Friday, 28 January 2011

Incentives matter: bonuses versus fines file

Research by Daniele Nosenzo, Theo Offerman, Martin Sefton and Ailko van der Veen looks at the question, Why pay mangers a bonus for doing well rather than fine them if they do badly? The research suggests that fines are better incentives than bonuses.

The paper is Inducing Good Behavior: Bonuses versus Fines in Inspection Games. The abstract reads:
We examine the effectiveness of bonuses and fines in an ‘inspection game’ where an employer can learn the effort of a worker through costly inspection. Standard game theoretic analysis predicts that fines discourage shirking, whereas bonuses encourage shirking. In contrast, ownpayoff effects suggest that both fines and bonuses discourage shirking. In an experiment we find that fines are more effective than bonuses in reducing shirking. However, we do not find that bonuses encourage shirking. Behavioral theories based on Impulse Balance Equilibrium or Quantal Response Equilibrium provide a good account of deviations from Nash equilibrium predictions.

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