Topic 3: Incentives in Firms & Field Experiments Topic 3: Incentives in Firms & Field Experiments Libor Dušek VSE Prague Applied Microeconomics, VŠE Summer Semester 2017/2018 Topic 3: Incentives in Firms & Field Experiments Introduction Incentives § § People respond to incentives Incentives are crucial in firms § § § Moral hazard problem Managers have limited ability to monitor workers Giving workers the right incentives important for § § Worker productivity Firm productivity Topic 3: Incentives in Firms & Field Experiments Introduction Specific issue: Piece rate vs relative pay § Piece rate: the worker is paid a fixed rate per each unit of output Wi “ βhyi (1) § Relative pay: the worker is paid based on the difference between his output and the average output of all other workers Wi “ w h § yi y Why would a firm offer the (more complicated) relative incentive scheme? § § common shocks to productivity (e.g. high/low-yield field) extra risk for workers workers are then insured against this risk Ñ can offer lower expected wage (2) Topic 3: Incentives in Firms & Field Experiments Introduction Theoretical incentive effects § Piece rate: high-powered incentive θi ei2 2 (3) θi ei2 ei ´ e 2 (4) maxei βei ´ § Relative pay: also. maxei w § § § § § Higher effort increases the average That reduces own earnings (negligible in large groups) Negative externality on other workers. Homo oeconomicus workers: effort should be the same under piece rate and relative pay BUT, if workers care about other workers ..... Topic 3: Incentives in Firms & Field Experiments Introduction Solve for optimal effort under piece rate and relative pay1 1 Derivation: class notes page 20 Topic 3: Incentives in Firms & Field Experiments Introduction Social preferences § The utility of other workers enter the worker’s objective function ˜ ¸ ÿ θj ej2 ej θi ei2 ei maxei w ´ ` πi w ´ e 2 e 2 j‰i (5) § Then workers have an incentive to shirk in order not to hurt other workers § The magnitude of this “internalization of externality” depends on πi Topic 3: Incentives in Firms & Field Experiments Introduction Solve for optimal effort under relative pay and social preferences 2 2 Derivation: class notes page 20 Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Field experiments by Bandiera, Rasul and Barankay 2005, 2007 § A large farm in the U.K. § Detailed personnel data from one harvest season § Workers from Eastern Europe, hired seasonally, live on a farm § Pick fruit on fields, assigned by managers § Individual effort § Productivity measured precisely (amount of fruit picked by each worker) § 10,215 worker-field-day observations, 142 workers, 108 days Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Field experiment 1: Piece rate vs relative pay § The farm switched the compensation scheme: § § § relative pay for 54 days piece rate for 54 days announced to workers on the day it was implemented § Variation: within-worker over time § No explicit control group Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Raw mean comparison Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Productivity over time Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Formal regression tests § Some natural concerns: § § productivity grows over time (experience) assignment of workers to fields not random yift “ γPt ` αi ` λf ` κt ` δXift ` ηZft ` uift § § § § § § Pt ... treatment dummy (piece rates in place) i ... worker; αi ... worker fixed effect f ... field; λf ... field fixed effect t ... time (day), κt ... time trend Xift ... time-varying worker characteristics (experience) Zft ... time varying field characteristics (life-cycle) (6) Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Basic regression Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives More direct evidence on the social incentives § Workers should be less productive under relative pay when they work with people whom they care about § They surveyed the workers, asking to name up to five other workers who are friends Construct a measure of worker’s personal ties: § § § § for each worker and day, the share of other workers on that day and on that field who are his friends Workers do not decide whom they work with (managers assign to particular fields) Alternative explanation? Workers are less productive when working with friends because they talk § But this would be the case under piece rates as well Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Regression test of social preferences Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives The size of the social weight § Calibrate the model to obtain estimates of πi § The average worker has πi “ 0.65 § Social preferences are quantitatively important, have an effect on workers’ effort under monetary incentive schemes Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Other findings - wages § When switching to piece rate, the wage w was targeted such that the workers with average productivity earn the same as before § In fact, with the change in productivity, the wage per kilogram declined § The total daily pay did not change Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Wage per kilogram Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Daily pay Topic 3: Incentives in Firms & Field Experiments Field experiment 1: Worker incentives Other findings - wages and profits § Workers made worse off by the switch to the piece rate § Higher effort, same total pay § Change highly profitable for the firm § All the productivity gain accrued to the firm § This may not be the long-run equilibrium (selection of workers for the next season) Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives Field experiment 2: Incentives of managers § Question: what is the effect of providing high-powered incentives to managers on the productivity of subordinate workers? § Same context (same farm, one year later) Experiment § § § § managers paid fixed wage the first half of the harvest season switched to fixed wage plus bonus in the middle of the season, based on the output on a given field-day exceeding a given threshold 9897 worker-field-day observations, 11 managers, 197 workers, 95 days Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives How managers affect worker productivity: context § Workers: § § § § § Managers (10): § § § § § paid piece rates differ in productivity and chosen effort do not choose hours or where they work seasonal workers, live on the farm, may be called to do non-picking tasks or left unemployed for a day Manage about 20 workers Decide who works and where (picking rows) Collect output, make sure workers have new crates Constant movement around the field ñ total effort and targeting of effort to individual workers Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives How managers affect worker productivity: theory § Targeting effort to individual workers § Selecting workers Presumably complementarity between the workers’ and managers’ effort § § E.g., manager makes sure the most productive workers are not left idle Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives How managers affect worker productivity: theory 3 § Simple model: marginal productivity of effort equalized across workers § Higher bonus: may or may not increase dispersion of effort between workers, depending on curvatures Presumably it is costly for managers to target their effort unequally between workers § § § § learing the worker type requires costly effort aversion to unequal treatment, worker conflicts Higher bonus incentivizes the manager to target effort more unequally Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives Productivity over the season Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives Placebo test (next season with no change) Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives Mean comparison Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives Regression test Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives Distribution of worker productivity Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives Key findings § Introducing managerial bonuses substantially increased productivity of subordinate workers § Large effect (20 percent) § Variance of worker productivity increased as well Mechanisms? § § § Targeting of managerial effort toward more able workers Selection of less able workers (ambiguous effect on variance) Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives Evidence on targeting Topic 3: Incentives in Firms & Field Experiments Field experiment 2: Managerial incentives Evidence on selection Topic 3: Incentives in Firms & Field Experiments Conclusions Some broader lessons § Introducing higher-powered incentives had substantial effect on productivity (at least in the context of a given farm) § Major increase in profitability Broader implications (outside of the experiment) § § § § Selection of workers and managers into the firm Inequality Experimenting with incentives is useful for firms ñ finding most profitable ways of doing business Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Education, Incentives, and Field Experiments § § Broader question: Can explicit, short-term monetary incentives improve the school performance of pupils and/or teachers? The underlying problems: § § § § § Some pupils (classes, schools) clearly under-achieve High returns to education, to completing the elementary school or high school Children are myopic Lack parental background to push them to perform in school What works? Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Levitt, List and Sadoff: The effect of performance-based incentives on educational achievement: Evidence from a randomized experiment § § One paper from a larger agenda of experiments on incentives in education Context: badly performing public high schools in Chicago Heights (low-income, minority suburb) § § § § Only 20% of 11-graders meet the state standards Less than a third meet the standards set by the school Less than half of the freshmen eventually graduate Policy motivation: desperately try anything Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Some distinct features § Experimenting with money incentives to students or to parents § § § § Experimenting with a fixed rate or a lottery § § Parental input important as well The family “should” redistribute transfers But transfers from children to parents may be impossible People tend to overstate small probabilities Fairly long follow-up period Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Experimental design § Subject pool: high-school freshmen in two public schools § 4 treatment and 1 control groups (equally sized) § Pre-treatment period (data for selection): September § Treatment period: October to May Participants in T groups qualified for monthly money rewards if they met the achievement standard : § § § § § no more than one unexcused absence in the month no all-day suspensions in the month letter grades C or higher in all classes Monthly rewards were independent Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Experimental design: reward structures § 2 ˆ 2 design § parent ˆ student reward § fixed reward ˆ lottery § fixed reward: $50 for meeting the monthly achievement standard § lottery reward: 10 out of 100 names selected each month; if they met the standard, they received $500 § lottery winners also driven home in a limo § monthly informational meetings with incentivesed attendance, feedback on the students performance .... Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Sample characteristics Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Experimental design: outcomes, student groups § Achievement (dummy =1 if meeting the monthly achievement standard) § Also average grades, test scores, attendance, eventual graduation Expect differential effects: students on the margin of failing most likely to be affected § § § Predict the GPA based on observables Threshold students: -0.75 to +0.25 GPA around the standard Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Effects visualized Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Treatment effects by student subsamples Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Treatment effects by reward types Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Were students gaming the incentives? Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Long-term effects Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Summary and of the results § The money incentives work § The effects are relatively modest, but concentrated among the threshold students § On the threshold, improvements in achievement from 0.26 by 0.1-0.15 § Both fixed and lottery worked (limitations?) § The effects persist for 1 year after treatment § Real limitations given by the students’ background (some can’t achieve even if they want to) Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Other field experiments in plighted schools by List & Co § § Delayed rewards by 1 month ñ absolutely no effect Rewards to student, parent, teacher: § § § § full reward to only one 1/3 reward to each ñ individual award more powerful Teacher incentives: § § § large rewards (avg $4000) for the class meeting test score standards further framed as “loss” or “gain” ñ far larger effects in the “loss” framing Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Policy discussion Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Policy discussion § Does paying money to pupils for studying sound preposterous? Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Plausible criticisms § § It costs money Money incentives drive out the intrinsic incentives § § § In general, a real issue Not in the context of the failing high-schools Plainly repugnant Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Policy applicability: it costs money § Does paying money to pupils for studying sound preposterous? § Objective: improve the performance of kids § What are the alternative policies? Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Policy discussion § Does paying money to pupils for studying sound preposterous? § Objective: improve the performance of kids What are the alternative policies? § § § § reduce the class size better teachers (i.e., pay teachers more to attract more able people) tutoring Topic 3: Incentives in Firms & Field Experiments Education, Incentives, and Field Experiments Incentives vs other policies § Pragmatic question: which measures buy more value for the money? § If the incentives bring the same improvement in performance as the reduction is class size, for the same expenditure of public money, which measure should an economist recommend? Topic 3: Incentives in Firms & Field Experiments Field Experiments: A Primer Field Experiments: A Primer § § Becoming more widespread in academia, firms, public sector Attraction: § § § Truly experimental (random) variation in the intervention ñ unambiguously causal inference Easy to explain and interpret Pilot projects Topic 3: Incentives in Firms & Field Experiments Field Experiments: A Primer Basic design § Treatment: An intervention the causal effect of which we are studying § Outcome(s) Y : Observable, measurable variable(s) of interest potentially affected by the treatment § Subjects: Unit level of the analysis (employees, customers, divisions...) § Treatment Group T : Subjects that receive treatment, randomly selected § Control Group C : Subjects that don’t § Treatment Period T “ 1: Time when treatment in place Topic 3: Incentives in Firms & Field Experiments Field Experiments: A Primer Estimator of the treatment effect § Ideal setting: observations on both treatment and control group, before and during the treatment period pYT 1 ´ YT 0 q ´ pYC 1 ´ YC 0 q Yit “ βDC ˚ DT 1 ` γC DC ` γT DT 1 ` pδXit q ` it (7) (8) § Common shocks (e.g. macro shocks) don’t matter § What if the common shocks interact with the treatment? § Lack of the pre-treatment period, or of the control group, are surmountable but less-than-ideal Topic 3: Incentives in Firms & Field Experiments Field Experiments: A Primer Crucial Design Issues 1. A well-formulated hypothesis (grounded in theory) - will guide the rest 2. Unit of analysis (workers, divisions, suppliers) 3. Control group: ideal, but ... § § § § The control group may react to not being treated (contamination bias) Difficult to prevent the control group from learning about the treatment received by the treatment group Separating T and C groups: may expose them to different conditions Switching units between T and C at exogenously given time Topic 3: Incentives in Firms & Field Experiments Field Experiments: A Primer Crucial Design Issues Cont. 4. Randomization technique 5. Implementation § § Sticking to the protocol, ensuring compliance Making sure the T group receives just that treatment, C group is not “compensated” by other treatment Topic 3: Incentives in Firms & Field Experiments Field Experiments: A Primer Randomization: context § Purely experimental randomization § Pilot project § Oversubscription (public sector) § Gradual phase-in: randomize the order § Encouragement design Topic 3: Incentives in Firms & Field Experiments Field Experiments: A Primer Ethics and Information § Should subject be informed that they are part of an experiment? § § § § § Purely academic answer: NO. Hawthorne effect (may render some experiments ineffective) Ethical objections People generally do not like the idea that they are being experimented on Compromises: § § § Subjects informed they are part of a study (pilot project, testing something new) Subjects should not be harmed by the experiment Option to withdraw (equal across T and C groups) Topic 3: Incentives in Firms & Field Experiments The Use of Field Experiments Field Experiments: Limitations § § Short-term horizon: short-term responses (Shi (2010)) Broader effects difficult to test § § Selection effects (of course, one can design experiments precisely to test the selection effects) General equilibrium effects § External validity § Could be expensive Topic 3: Incentives in Firms & Field Experiments The Use of Field Experiments Benefits § Increasing firm profitability § § § § Majority of field experiments with firms showed ways to increase profits Do firms maximize profits? Do firms aim to maximize profits? How good are they at it? § Testing new ideas (product designs, user experience, pricing, compensation policies,...) § Decisions based on hard evidence (“What works?”) § Better public policies Topic 3: Incentives in Firms & Field Experiments The Use of Field Experiments Just a Few Examples § Piece rates at the English farm § Google (about 10,000 per year): user interface, ranking of searches and ads § Humana: follow-up on patients released after heart attack § What works in eliciting charitable donations (John List experiments) Public sector: § § § British tax authority: Nudges to make taxpayers pay taxes on time Mexico’s PROGRESA Topic 3: Incentives in Firms & Field Experiments The Use of Field Experiments Important Literature and Action § John List and Uri Gneezy: The Why Axis (2013), book § Bandiera, Barankay and Rasul: Field Experiments with Firms (JEP 2011) § Poverty Action Lab at MIT § Urban Labs at the U Chicago Public Policy School § Esther Duflo: Using Randomization in Develpment Economics Research: A Toolkit (WP 2006) Topic 3: Incentives in Firms & Field Experiments The Use of Field Experiments Final advice on the field experiments: Do it.
