Wednesday, 19 October 2016

For just how long are there "behavioural" responses to contract changes?

In a recent paper in the American Economic Review (vol. 106, no. 2, February 2016, pp.316-58) Rajshri Jayaraman, Debraj Ray and Francis de Véricourt look at the Anatomy of a Contract Change.

The abstract reads:
We study a contract change for tea pluckers on an Indian plantation, with a higher government-stipulated baseline wage. Incentive piece rates were lowered or kept unchanged. Yet, in the following month, output increased by 20 to 80 percent. This response contradicts the standard model and several variants, is only partly explicable by greater supervision, and appears to be "behavioral." But in subsequent months, the increase is comprehensively reversed. Though not an unequivocal indictment of "behavioral" models, these findings suggest that nonstandard responses may be ephemeral, and should ideally be tracked over an extended period of time.
So we see behavioural responses in the short-run but they fade over the longer term. What does this tell us about the likely long-term effects of Walmart's much publicised "efficiency wage" experiment?

Jayaraman, Ray and de Véricourt conclude their article by saying,
Our study suggests that classical monetary incentives ultimately dominate, despite a possibly “behavioral” response in the shorter term. More generally, our findings speak to a literature in behavioral economics that highlight both the interaction between “intrinsic” and “extrinsic” motivations, as well as the dynamic evolution of those motivations following a policy change: see Gneezy and Rustichini (2000) and Gneezy, Meier, and Rey-Biel (2011). This literature emphasizes how the introduction of financial incentives might erode more social incentives (reciprocity, gratitude, or fair play).

In this paper the baseline relationship is an employment contract. The transaction is monetary to begin with, and gratitude, reciprocity and prosocial behavior are secondary considerations. Do prosocial motivations ultimately hold sway? It would appear not: they matter in the short run, but do not persist. Ultimately, in this labor market setting, monetary incentives come to dominate their nonpecuniary counterparts. This is not to argue that agents are never driven by notions of the social good, or that loyalty to an employer cannot be nurtured. But, particularly in markets where the fundamental relationship is delineated along economic lines, we need to be alert to the possibility that long- and short-term effects differ, and consequently to the hurried classification of many important economic phenomena as fundamentally “behavioral.”
At the very least these results suggest that it is important to examine responses to a policy change, not just immediately after the change but for a substantive period of time afterwards since short and long-term responses can differ substantially.

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