Posts tagged with: Incentive

Imagine that you have a series of plumbing problems in your house—clogged sinks, backed up toilets—and decide to hire a plumber. Which of these two incentive structures would you choose?

(A) The plumber only gets paid when the problems are fixed.
(B) The plumber will continue to be paid indefinitely for working on the problem, and will continue to get paid as long as the problem persists

Most of us would choose option A since we are more interested in functional indoor plumbing than we are in providing a paycheck for plumbers. Hard-working plumbers should prefer option A too since it respects their dignity and skills. The vocation of the plumber is to solve plumbing problems, not to latch onto make-work projects.

So if most people would choose option A, why does the government almost always adopt an incentive structure that reflects option B?

Blog author: dpahman
Tuesday, August 14, 2012

I have written on several recent occasions about the role of incentives in education, both for teachers and for students (see here, here, and here). Yesterday, David Burkus, editor of LDRLB, wrote about a recent study by Harvard University economic researchers on the role of incentives in teacher performance. Interestingly, they found that incentives (such as bonus pay) are far more effective if given up front with the caution that they will need to be returned if the teacher’s performance is not up to par. When teachers regarded the bonuses as already their property, they fought far more effectively to protect them.

Burkus writes,

A total of 150 teachers were randomized into several groups, including a control group, a traditional pay-for-performance group, and another group given a $4,000 bonus up front and told it would be reduced in relation to their students’ performance. The results were as impressive as they were surprising. On average, the students taught by the upfront bonus group outperformed students with similar backgrounds by up to 10 percentage points.

One possible explanation for this effect is “loss aversion.” Simply put, we’re more motivated to protect assets that we already have than to attempt to gain more assets. Once we are given an object or sum of money, we begin to build psychological connections to it, picturing the ways we’ll enjoy owning it or remembering fondly the ways we’ve used it. Perhaps what was missing from the incentives equation was the subtle push provided by the thought of loss.

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