A growing number of studies use “real” effort designs for laboratory experiments where subjects complete an actual task to exert effort rather than using a stylized effort design where subjects simply choose an effort level from a predefined set. The commonly argued reason for real effort is that it makes the results more generalizable and field relevant. We investigate the nature of modeling effort provision by first trying to provide a clear theoretical understanding of the nature of effort costs. We then empirically examine claims about the differences between real effort and stylized effort. A key to our examination is ensuring that we compare the two modes of effort provision keeping effort costs constant, which is a point overlooked in many past examinations. In our data, when controlling for effort costs, we find no differences in behavior between real and stylized effort. Given the importance of effort costs and the lack of a generally accepted way to include them in real effort designs, we provide a simple add-on that any researcher can use with their real effort experiments to incorporate a theoretically appropriate and controlled cost of effort even in a real effort setting. We also discuss ways to better approach modeling effort costs in experiments, whether one is conducting real or stylized designs, to improve inference on research questions.

Motivated by problems of coordination failure in organizations, we examine how overcoming coordination failure and maintaining coordination depend on the ability of individuals to observe others’ choices. Subjects’ payoffs depend on coordinating at high effort levels in a weak-link game. Treatments vary along two dimensions. First, subjects either start with low financial incentives for coordination, which typically leads to coordination failure, and then are switched to higher incentives or start with high incentives, which usually yield effective coordination, and are switched to low incentives. Second, as the key treatment variable, subjects either observe the effort levels chosen by all individuals in their experimental group (full feedback) or observe only the minimum effort (limited feedback). We find three primary results: (1) When starting from coordination failure the use of full feedback improves subjects’ ability to overcome coordination failure, (2) When starting with good coordination the use of full feedback has no effect on subjects’ ability to avoid slipping into coordination failure, and (3) History-dependence, defined as dependence of current effort levels on past incentives, is strengthened by the use of full feedback.

Coordinating activity among members is an important problem faced by organizations. When firms, or units within firms, are stuck in bad equilibria, managers may turn to the temporary use of simple incentives—flat punishments or rewards—in an attempt to transition the firm or unit to a more efficient equilibrium. We investigate the use of incentives in the context of the “minimum-effort,” or “weak-link,” coordination game. We allow groups to reach the inefficient equilibrium and then implement temporary, flat, “all-or-none” incentives to encourage coordination on more efficient equilibria. We vary whether incentives are positive (rewards) or negative (penalties), whether they have substantial or nominal monetary value, and whether they are targeted to a specific outcome (the efficient equilibrium) or untargeted (apply to more than one outcome). Overall, incentives of all kinds are effective at improving coordination while they are in place, but there is little long-term persistent benefit of incentives—once incentives are removed, groups tend to return to the inefficient outcome. We find some differences between different kinds of incentives. Finally, we contrast our results to other recent work demonstrating greater long-term effectiveness of temporary incentives.

We conduct a laboratory experiment among male participants to investigate whether rewarding schemes that depend on work performance—in particular, tournament incentives—induce more stress than schemes that are independent of performance—fixed payment scheme. Stress is measured over the entire course of the experiment at both the hormonal and psychological level. Hormonal stress responses are captured by measuring salivary cortisol levels. Psychological stress responses are measured by self-reported feelings of stress and primary appraisals. We find that tournament incentives induce a stress response whereas a fixed payment does not induce stress. This stress response does not differ significantly across situations in which winners and losers of the tournament are publically announced and situations in which this information remains private. Biological and psychological stress measures are positively correlated, i.e. increased levels of cortisol are associated with stronger feelings of stress. Nevertheless, neither perceived psychological stress nor elevated cortisol levels in a previous tournament predict a subsequent choice between tournaments and fixed payment schemes, indicating that stress induced by incentives schemes is not a relevant criterion for sorting decisions in our experiment. Finally, we find that cortisol levels are severely elevated at the beginning of the experiment, suggesting that participants experience stress in anticipation of the experiment per se, potentially due to uncertainties associated with the unknown lab situation. We call this the novelty effect.

We use different incentive schemes to study truth-telling in a die-roll task when people are asked to reveal the number rolled privately. We find no significant evidence of cheating when there are no financial incentives associated with the reports, but do find evidence of such when the reports determine financial gains or losses (in different treatments). We find no evidence of loss aversion in the standard case in which subjects receive their earnings in a sealed envelope at the end of the session. When subjects manipulate the possible earnings, we find evidence of less cheating, particularly in the loss setting; in fact, there is no significant difference in behavior between the non-incentivized case and the loss setting with money manipulation. We interpret our findings in terms of the moral cost of cheating and differences in the perceived trust and beliefs in the gain and the loss frames.

Monetary incentives are a procedural pillar in experimental economics. By applying four distinct monetary incentive schemes in three experimental finance applications, we investigate the impact of an incentive scheme’s salience on results and elicit subjects’ perception of the experienced scheme. We find (1) no differences in results between salient schemes but a significant impact if the incentive scheme is non-salient. (2) The number of previous participations has a significant impact on the perception of the incentive scheme by subjects: it strongly correlates with subjects’ motives for participation, positively contributes to subjects’ understanding of the incentive scheme, but has no influence on subjects’ motivation within the experiment. (3) Subjects favor more salient over less- or non-salient schemes in the gain domain and negatively evaluate high salience in the loss domain.

We examine the incentive effects of funding contracts on entrepreneurial effort and on allocative efficiency. We experiment with funding contracts that differ in the structure of investor repayment and, thus, in their incentives for the provision of entrepreneurial effort. Theoretically the replacement of a standard debt contract by a repayment-equivalent non-monotonic contract reduces effort distortions and increases efficiency. Likewise, distortions can be mitigated by replacing outside equity by a repayment-equivalent standard-debt contract. We test both hypotheses in the laboratory. Our results reveal that the incentive effects of funding contracts must be experienced before they are reflected in observed behavior. With sufficient experience, observed behavior is either consistent with or close to theoretical predictions and supports both hypotheses. If we allow for entrepreneur-sided manipulations of project outcomes, we find that non-monotonic contracts lose much of their appeal.

I study the effect of task difficulty on workers’ effort. I find that task difficulty has an inverse-U effect on effort and that this effect is quantitatively large, especially when compared to the effect of conditional monetary rewards. Difficulty acts as a mediator of monetary rewards: conditional rewards are most effective at the intermediate or high levels of difficulty. The inverse-U pattern of effort response to difficulty is inconsistent with many popular models in the literature, including the Expected Utility models with the additively separable cost of effort. I propose an alternative mechanism for the observed behavior based on non-linear probability weighting. I structurally estimate the proposed model and find that it successfully captures the behavioral patterns observed in the data. I discuss the implications of my findings for the design of optimal incentive schemes for workers and for the models of effort provision.

This paper reports a field experiment involving manipulation of invitations to register in an experimental economics subject database. Two types of invitations were sent out: one emphasizing pecuniary and the other non-pecuniary benefits of participation. The former resulted in higher response rate and the strength of this treatment effect was comparable in different groups defined by gender and academic major. In a follow-up test conducted about a year later it was found that individuals recruited by invitations emphasizing monetary benefits were less willing to make an effort to participate in a non-paid survey. The very same survey also showed that they were marginally less altruistic in general.

We conducted a series of field experiments to investigate the ability of experimentally measured risk preferences to predict the contractual choices of workers in the real labour market. In a first set of experiments we twice measured workers’ risk preferences using the lottery approach of Holt and Laury (Am Econ Rev 92(5):1644–165, 2002). These workers subsequently participated in a contract-choice experiment, making 12 decisions. For each decision, the worker chose between his/her regular piece-rate contract and a particular fixed wage contract, each distinguished by the level of the fixed wage. One of the twelve decisions was then chosen at random and the worker was paid according to his/her choice for that decision over a period of two working days. We estimate the effect of risk preferences on contractual choices, controlling for measurement error and worker ability. Risk preferences effectively predict contract choices—risk-averse workers are more likely to select fixed-wage contracts. High-ability workers prefer piece-rates.

Agency theory has established that appropriate incentives can reconcile the diverging interests of the principal and the agent. Focusing on three applications, this dissertation evaluates the empirical relevance of these results when a third party interacts with the primary contract. The analyses provided rely on either laboratory or natural experiments.

First, corruption is analyzed as a two-contract situation: a delegation contract between a Principal and an Agent and a corruption pact concluded between this Agent and a third player, called Briber. A survey of the recent microeconomic literature on corruption first highlights how corruption behavior results from the properties of those two agreements. We thereafter show that the Agent faces a conflict in reciprocities due to those two conflicting agreements. The resulting delegation effect, supported by observed behavior in our three-player experimental game, could account for the deterrence effect of wages on corruption.

Second, health care is governed by contradictory objectives: patients are mainly concerned with the health provided, whereas containing health care costs is the primary goal of health care administrators. We provide further insights into the ability of incentives to balance these two competing objectives. In this matter, our theoretical and econometric analysis evaluates how a new mixed compensation scheme, introduced in Quebec in 1999 as an alternative to fee-for-services, has affected physicians’ practice patterns. Free switching is shown to be an essential feature of the reform, since it implements screening between physicians.

Finally, the demand for underground work departs from the traditional Beckerian approach to illegal behavior, due to the dependence of benefits from illegality on competitors’ behavior. We set up a theoretical model in which the demand for underground work from all producers competing on the same output market is analyzed simultaneously. We first show that competition drastically undermines the individual benefits of tax evasion. At equilibrium, each firm nonetheless chooses evasion with a positive probability, strictly lower than one. This Bertrand curse could then account for the “tax evasion puzzle” i.e. the overprediction of evasion in models that ignore market interactions. We thereafter show that allowing firms to denounce competitors’ evasion is not likely to solve this curse—by providing a credible threat against price cuts, it fosters illegal work. Empirical evidence from a laboratory experiment confirms these predictions. Without denunciation, experimental firms often choose evasion whereas evasion benefits are canceled out by competition. When introduced, denunciation is rarely used by firms, but the threat makes evasion profitable.

We analyze the effect of investments in corporate social responsibility (CSR) on workers’ motivation. In our experiment, a gift exchange game variant, CSR is captured by donating a certain share of a firm’s profit to charity. We are testing for CSR effects by varying the possible share of profits given to charity. Additionally, we investigate the effect of matching mission preferences, i.e., a worker preferring the same charity the firm donates to. Our results show that, on average, workers reciprocate investments in CSR with increased effort. Matching mission preferences also result in higher effort, independently of the extent of the CSR investment.

We design a lab-in-the-field experiment involving naturally occurring groups operating in three South-African townships. We introduce an incentives-based mechanism named “participatory incentives” consisting of monetary incentives that are awarded conditional on the group reaching a threshold of minimum level of joint contribution to a common project or good. We show that participatory incentives significantly raise average contribution levels (from 29 to 62% of the endowment) and are even more effective in the presence of highly deprived people. We complement the reduced form estimations of the experimental data with a structural model that sheds light on the role of subjects’ beliefs and responsiveness to a social norm of high cooperation.

Experiments frequently use a random incentive system (RIS), where only tasks that are randomly selected at the end of the experiment are for real. The most common type pays every subject one out of her multiple tasks (within-subjects randomization). Recently, another type has become popular, where a subset of subjects is randomly selected, and only these subjects receive one real payment (between-subjects randomization). In earlier tests with simple, static tasks, RISs performed well. The present study investigates RISs in a more complex, dynamic choice experiment. We find that between-subjects randomization reduces risk aversion. While within-subjects randomization delivers unbiased measurements of risk aversion, it does not eliminate carry-over effects from previous tasks. Both types generate an increase in subjects’ error rates. These results suggest that caution is warranted when applying RISs to more complex and dynamic tasks.

Firms face an optimization problem that requires a maximal quantity output given a quality constraint. But how do firms incentivize quantity and quality to meet these dual goals, and what role do behavioral factors, such as loss aversion, play in the tradeoffs workers face? We address these questions with a theoretical model and an experiment in which participants are paid for both quantity and quality of a real effort task. Consistent with basic economic theory, higher quality incentives encourage participants to shift their attention from quantity to quality. However, we also find that loss averse participants shift their attention from quality to quantity to a greater degree when quality is weakly incentivized. These results can inform managers of appropriate ways to structure contracts, and suggest benefits to personalizing contracts based on individual behavioral characteristics.

Belief elicitation is an important methodological issue for experimental economists. There are two generic questions: 1) Do incentives increase belief accuracy? 2) Are there interaction effects of beliefs and decisions? We investigate these questions in the case of finitely repeated public goods experiments. We find that belief accuracy is significantly higher when beliefs are incentivized. The relationship between contributions and beliefs is slightly steeper under incentives. However, we find that incentivized beliefs tend to lead to higher contribution levels than either non-incentivized beliefs or no beliefs at all. We discuss the implications of our results for the design of public good experiments.

There is a large literature evaluating the dual process model of cognition, including the biases and heuristics it implies. However, our understanding of what causes effortful thinking remains incomplete. To advance this literature, we focus on what triggers decision-makers to switch from the intuitive process (System 1) to the more deliberative process (System 2). We examine how the framing of incentives (gains versus losses) influences decision processing. To evaluate this, we design experiments based on a task developed to distinguish between intuitive and deliberative thinking. Replicating previous research, we find that losses elicit more cognitive effort. Most importantly, we also find that losses differentially reduce the incidence of intuitive answers, consistent with triggering a shift between these modes of cognition. We find substantial heterogeneity in these effects, with young men being much more responsive to the loss framing. To complement these findings, we provide robustness tests of our results using aggregated data, the imposition of a constraint to hinder the activation of System 2, and an analysis of incorrect, but unintuitive, answers to inform hybrid models of choice.

In this project, we manipulate the public observability of forecasts and outcomes of a physical task. We explore how these manipulations affect overconfidence (OC). Participants in the experiment are asked to hold a weight after predicting how long they think they could do it for. Comparing the prediction and outcome times (in seconds) yields a measure of OC. We independently vary two dimensions of public observability (of the outcome and of the prediction). Additionally, we manipulate incentives to come up with an accurate prediction. This design allows us to shed light on the mechanism behind male and female OC. Following the existing literature, we formulate several hypotheses regarding the differences in predictions and outcomes for males and females in the presence of the public observability of predictions and outcomes. Our experimental data do not provide support to most of the hypotheses: in particular, there is no evidence of a gender gap in overconfidence. The most robust finding that emerges from our results is that incentives on making correct predictions increase participants’ forecasts on their own performance (by about 24%) and their actual performance as well, but to a lower extent (by about 8%); in addition, incentives to predict correctly in fact increase error for females (by about 33%).