Carrots that look like sticks

A well known result in the contracts literature in that if the output of one or more tasks is more straight forward to measure than the output of other tasks then piece-rate incentive schemes will lead to a distortion of effort toward the more easily monitored outcomes. A new NBER working paper by Omar Al-Ubaydli, Steffen Andersen, Uri Gneezy and John A. List argues that contrary to the above argument the use of piece rates can, when the agent is uncertain about the principal’s monitoring ability, signal to the agent that the principal is efficient at monitoring. Such a signal induces greater effort on all fronts.

Carrots that Look Like Sticks: Toward an Understanding of Multitasking Incentive Schemes
Omar Al-Ubaydli, Steffen Andersen, Uri Gneezy, John A. List

NBER Working Paper No. 18453
Issued in October 2012
NBER Program(s): LS

Constructing compensation schemes for effort in multi-dimensional tasks is complex, particularly when some dimensions are not easily observable. When incentive schemes contractually reward workers for easily observed measures, such as quantity produced, the standard model predicts that unrewarded dimensions, such as quality, will be neglected. Yet, there remains mixed empirical evidence in favor of this standard principal-agent model prediction. This paper reconciles the literature by using both theory and empirical evidence. The theory outlines conditions under which principals can use a piece rate scheme to induce higher quantity and quality levels than analogous fixed wage schemes. Making use of a series of complementary laboratory and field experiments we show that this effect occurs because the agent is uncertain about the principal’s monitoring ability and the principal’s choice of a piece rate signals to the agent that she is efficient at monitoring.