Should Managers Use Team-Based Contests? Hua Chen / Noah Lim http://devana.rs/blog/wp-content/uploads/2014/08/4862920379_1d823f33c3_b_stick-and-carrot.jpg Jasmin Sulerz Experimental and Behavioral Economics SS 2016

Agenda Overview I Introduction Contests and Assumptions II Experiments III Results and Discussion

Research Question Previous literature has focused on three major questions: Individual-based contests: What are the optimal number of winners and price values Team-based contests: Relative performance of team-based incentive contracts Team-based contests: Influence of team-based characteristics, prize structure and team communication Should managers organize employees to compete as individuals or to compete with each other in teams? Source: http://www.sesp.northwestern.edu/masters-learning-and-organizational-change/knowledge-lens/stories/2011/team-based-rewards.html http://www.strategies.com/blog/wp-content/uploads/2013/05/greed.gif

Guilt aversion – Individuals would like to avoid this emotion Social preference if individuals feel that do not meet expectations with a potential reduction of payoff for a relationship partner Team-based contests: Payoff based on team performance in comparison with competing teams(- own decision cost)

Behavioral Economics Challenges Standard Economic Assumptions Free Riding Problem Effort levels expected in team-based (TB) contests will be lower than efforts in individual-based (IB) contests Conventional economics theory: employees competing in team-based competitions will „fail to internalize the benefits that accrue to other members of the team when making effort decisions“ Behavioral Economics Individuals are not purely self-interested Social preferences: Altriusm, inequality aversion, social comparisons, peer-induced fairness Furthermore, individual social preferences can vary depending on factors such as familiarity with other players and whether outcomes are made public Source: http://comoconsultants.com/wp-content/uploads/2014/02/Team-Guys.jpg

Experiments Design Experiment 1 Experiment 2 Experiment 3 Experiment 4 2x2 experiment design in TB and IB contest across two social setting (A & B) Degree of guilt aversion is expected to be stronger in an environment where team members feel more socially connected Validation Experiments Experiment 2 One shot: Team members were paired with a teammate just once Experiment 3 Guilt aversion test: Participants do not know their partners final number Experiment 4 Psychological drivers: Values of the winning and the losing price (wH and wL) were changed

Experiment 1 – Procedure and Results Social Condition A Seated apart from each other Random and anonymous pairing 15 rounds, rematch after 5 rounds Social Condition B Seated randomly in groups of 4 Introduction & Socializing Sudoku puzzle Randomly matched with one of the team members they socialized with  increase level of guilt aversion

Experiment 1 – Mean Effort Decisions Across Decision Rounds

Experiments 2, 3 and 4 – Validation Results One shot: Team members were paired with a teammate just once Experiment 3 Guilt aversion test: Participants do not know their partners final number Experiment 4 Psychological drivers: Values of the winning and the losing price (wH and wL) were changed

Results: Team-based Contests Can Induce Higher Efforts Than Individual-Based Contests If guilt aversion is sufficiently strong, efforts in Team-based contests should be higher relative to individual-based contests Socializing with team members increases the effort decisions since they increase the potential for guilt aversion Guilt aversion can be hampered if team member contributions are not made public Future Research: Compare TB and IB contests with more contestants and more complex prize structures Suggestions for Real-Life Managers Team up employees which know each other well as teammates Conduct social activities Managers should provide the opportunity to observe each others contribultions Source: http://comoconsultants.com/wp-content/uploads/2014/02/Team-Guys.jpg

Critical Remarks From the Authors I/II Utility specification may not the the best one – other functional forms may predict the behavior better across a wider array of TB contest Other than guilt aversion there might be other psychological drivers that can influence effort levels i.e. being the team member which contributes the most (if intra-group comparisons are possible) Heterogenous team members: Nature and degree of guilt aversion may be different and might be more difficult to implement i.e. weaker contestant might feel more guilt if matched with strong contestant and the strong contastant may be relucant to be matched with the weak contestant from the beginning Future Research: Compare TB and IB contest with more contestants and more complex prize structures

Critical Remarks From the Authors II/II 4. Complementarities among team members may influence effectiveness of team-based incentives compared to individual-based incentives i.e. team-based bonuses of factory workers can raise productivity more than individual-based bonuses 5. More than 2 team members: Incentives may be higher to free ride but may also increase disutility if they are responsible for a decline in the payoffs of their team members (depending in the relationship among team members) i.e. if team prize can be split unevenly within-team competition may increase and guilt aversion decline Future Research: Compare TB and IB contest with more contestants and more complex prize structures