Incentives and Behavior Prof. Dr. Heiner Schumacher KU Leuven 15. Identity and Motivation Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 1 / 27
Introduction Monetary incentive schemes have a number of problems. First, compensation schemes can only be based on observables that are easy to measure. Second, monetary incentives create opportunities to game the system (recall the lecture on multitask incentives). Third, in tournaments (i.e., competition for promotion) there are incentives to sabotage the colleagues’ work. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 2 / 27
Introduction Firms therefore may want to create non-monetary incentives that are based on social preferences. In this lecture, we will discuss two approaches from economics (identity and mission motivation) how to create non-monetary incentives in organizations. Both approaches are inspired by psychology and sociology. We will also consider the empirical & experimental evidence on identity and mission motivation. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 3 / 27
Introduction Overview Identity Empirical Evidence (1): Ingroup and Outgroup E¤ects Empirical Evidence (2): Priming Social Identity Mission Motivation Empirical Evidence: How Much Does the Mission Matter? Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 4 / 27
Identity In traditional models from organizational economics (as the principal-agent model discussed in class), individual preferences are …xed and utility depends on pecuniary variables only. In contrast, Akerlof and Kranton (2005) argue that individuals have an identity that in‡uences behavior and that can be changed. 1 The ability of organizations to place workers into jobs with which they identify and the creation of such identities are central to what makes organizations work. 1 Akerlof, George, and Rachel E. Kranton (2005): “Identity and the Economics of Organizations,” Journal of Economic Perspectives 19(1), 9 - 32. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 5 / 27
Identity “On plebes’ …rst day at West Point, called R-Day, they strip down to their underwear. Their hair is cut o¤. They are put in uniform. They then must address an older cadet, with the proper salute and with the statement: “Sir, New Cadet Doe reports to the cadet in the Red Sash for the …rst time as ordered.” Plebes must stand and salute and repeat, and stand and salute and repeat, until they get it exactly right, all the while being reprimanded for every tiny mistake.” Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 6 / 27
Identity Social categories describe types of people (gender, race, occupation, etc.). People often think of themselves in terms of social categories. Identity describes a person’s social category. It captures how people feel about themselves, and how those feelings depend on actions. Utility depends on norms , i.e., ideas of how people of a given social category should behave. In a model of utility, identity describes gains and losses from behavior that conforms or departs from the norms of a particular social category. A person who identi…es with being a member of a particular social category then loses utility insofar as her behavior di¤ers from that of the ideal . An employee who identi…es himself with an organization is called an insider , while an employee who does not identify himself with the organization is called an outsider . Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 7 / 27
Identity Akerlof and Kranton (2005) create a simple preference model of identity. Think of a worker who chooses how much e¤ort e she wants to exert (assume that she may exert either high or low e¤ort). Let there be two social categories c , N and O . Her utility function is given by U ( y , e , c ) = ln y � e + I c � t c j e � ( c ) � e j , where y is her income, I c her identity utility from being in category c , and t c j e � ( c ) � e j the disutility from diverging from the ideal e¤ort level (denoted by e � ) for category c . Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 8 / 27
Identity If the worker has an identity as an insider, the presence of identity utility will reduce the wage di¤erential needed to induce the worker to exert high e¤ort. If the worker identi…es as an outsider, the presence of identity utility will increase the necessary monetary incentives. This creates the following trade-o¤: An organization may choose relatively high monetary incentives and no investments into changing workers’ identity, or relatively low monetary incentives and large e¤orts to change motivation by identity. What can a …rm do in order to increase its workers’ identi…cation with the …rm? Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 9 / 27
Identity The model also o¤ers implications for optimal organization. Assume that identity is created at the workgroup level. A supervisor may report the workers’ actions to management. However, workers do not like being monitored (recall the hidden costs of control), so they will identify less with the workgroup. They will then require higher pay to perform. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 10 / 27
Identity With strict supervision, the worker distinguishes herself from her supervisor. In reaction, she becomes an outsider. With loose supervision, the worker views the supervisor as part of the workgroup. The worker then identi…es with the workgroup and becomes an insider. Again, we obtain a trade-o¤ between monetary and non-monetary incentives. There exist several methods to manipulate worker-supervisor relations and workgroup identity: job rotation, workgroup composition, physical arrangements, …rm-sponsored activities, group lunchrooms, etc. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 11 / 27
Empirical Evidence (1): Ingroup and Outgroup E¤ects In a lab experiment, Chen and Li (2009) show how group identity changes economic preferences. 2 They use the “minimal group paradigm” from social psychology, i.e., a method for investigating the minimal conditions required for discrimination to occur between groups (that is, the group distinction per se has no meaning). On the following slides, we consider the most important …ndings of their study. 2 Chen, Yan, and Sherry Xin Li (2009): “Group Identity and Social Preferences,” American Economic Review 99(1), 431 - 457. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 12 / 27
Empirical Evidence (1): Ingroup and Outgroup E¤ects In the …rst stage, subjects review …ve pairs of paintings (in each pair, one is by Klee and one by Kandinsky). Based on reported preferences, subjects are divided into two groups, the Klee group and the Kandinsky group. In the second stage, they play a number of economic games with members of their own and the other group. Roughly, these games are other-other allocation games (subjects allocate tokens between two other anonymous participants; no tokens to herself), dictator games with varying endowments and trust-games with varying payo¤ consequences. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 13 / 27
Empirical Evidence (1): Ingroup and Outgroup E¤ects Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 14 / 27
Empirical Evidence (1): Ingroup and Outgroup E¤ects Other-other allocation games. The average number of tokens allocated to an ingroup member is signi…cantly more than that allocated to an outgroup member. Hence, there is ingroup favoritism in minimal groups paradigm experiments. Dictator games. Subjects exhibit a higher degree of altruism toward an ingroup member than to an outgroup member. Trust games. Subjects are more likely to reward and ingroup member than an outgroup member for good behavior. They are more forgiving toward misbehavior from an ingroup member than toward an outgroup member. Prof. Dr. Heiner Schumacher (KU Leuven) Incentives and Behavior 15. Identity and Motivation 15 / 27
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