Labor Supply Topics David L. Dickinson Appalachian State University April 2006: GATE.

“The Carrot vs. the Stick in Work Team Motivation.” David L. Dickinson, 2001, Experimental Economics Team labor/effort supply (not individual) Issue How to elicit higher contributions in VCM mechanism Relevance Public goods nature of work team output is key (see Alchian and Demsetz, 1972, AER) Will effort respond to reward/penalty incentives? What role does worker ability play? Are incentives worth their cost?

Prizes Naturally occurring work environment prizes Employee of the month awards Cash/stock bonuses Promotions Experimental environment prizes are simple: Cash ($) added to subject earnings

Penalties These are exogenous (unlike other VCM penalty experiments) Naturally occurring work environment penalties Verbal-written warning Suspension/probation discharge Experimental environment penalties are simple but more abstract from natural work penalties: Cash ($) taken away from subject earnings Marginal incentives made to mirror those of rewards treatment

Results See Table 3, Figure 2 All incentives tested increase team contributions. Handicapped prizes best (23-28%↑ gain) When no-handicapping used: Penalties better than prizes (by 6%) Revealed ability information limits contributions (Dispar) Higher variance in contribution levels when non-handicapped incentives are used.

Implications  Both Prizes and Penalties are effective  May be self-funding! (not yet tested experimentally)  Complementarities with Handicapping Differ  When ability information is most costly to gather---Penalties better than prizes  Penalties most likely suited for short-term or temporary work  Limitations  Both environments studied assume easily measured effort/output.  Team interdependence not captured in lab.  Study does not explore funding of such incentives