Core Readings

Holmstrom, B. and P. Milgrom, "Multi-Task Principal-Agent Problems: Incentive Contracts, Asset Ownership, and Job Design", Journal of Law, Economics and Organization 7 (Special issue, 1991): 24-52. 

Develops the multi-task principal-agent model where principal has several tasks for an agent and could only effectively measure the outcome of some tasks. Shows that an optimal incentive contract can be to pay a fixed wage independent of measured performance, since incentive pay also serves to direct the allocation of the agents’ attention among their various duties. In addition, job design is an important instrument for the control of incentives.  

Aghion, Philippe, and Jean Tirole. "Formal and Real Authority in Organizations" Journal of Political Economy 105, no. 1 (1997): 1-29. 

Aghion and Tirole build a principal-agent model where an agent can choose among several possible projects to work on.  When should the agent be allowed to make this decision? The authors found that delegation is more efficient for decisions that are relatively unimportant to the principal; for which the principal can trust the agent; that are important to the agent; and where the principal has low information or competence herself.  

Jacob, Brian A., and Steven Levitt, (2003). “Rotten Apples: An Investigation of the Prevalence and Predictors of Teacher Cheating,”  Quarterly Journal of Economics 118 (3): 843-877.

Estimates that serious cases of teacher or administrator cheating on standardized tests occur in a minimum of 4–5 percent of elementary school classrooms annually. Results highlight the fact that high-powered incentive systems, especially those with bright line rules, may induce unexpected behavioral distortions such as cheating. 

Council for Advancement and Support of Education (CASE), 2005. "CASE Statements on Compensation for Fundraising Performance".

“CASE discourages commission-based compensation for all fundraising employees of member institutions. It is recommended that all fundraising staff work for a salary, retainer, or fee, not a commission. Compensation should be predetermined and not based on a percentage of funds raised.”  The reasons given are nice illustrations of multi-task incentive issues."

Hong, Fuhai, Tanjim Hossain, John A. List, and Migiwa Tanaka, (2018). “Testing the Theory of Multitasking: Evidence From a Natural Field Experiment in Chinese Factories,”  International Economic Review Volume 59, Issue 2. Pages 511-536

Conducts a field experiment in Chinese factories.  Shows that workers increase the incentivized output (quantity) at the expense of the non-incentivized one (quality) as a result of a piece rate bonus scheme. 

Knutsson, Daniel and Björn Tyrefors  “The Quality and Efficiency of Public and Private Firms: Evidence from Ambulance Services” Quarterly Journal of Economics, Volume 137, Issue 4, November 2022, Pages 2213–2262.

Privately-owned ambulance services in Stockholm County, Sweden are financially incentivized to reduce costs and response times. Publicly-owned services face much lower financial incentives.  The authors use random assignment of patients to public versus private ambulances to show that private ambulances reduce costs and perform better on contracted measures such as response time, but perform worse on noncontracted measures such as mortality.  In fact, a patient has a 1.4% higher risk of death within three years if a private ambulance is dispatched. In part, this appears to be because private firms cut costs at the expense of ambulance staff quality.

Newer Resources

Zhao, Rui R. "All-or-nothing monitoring." American Economic Review 98.4 (2008): 1619-28)

Provides theoretical examples of cases where output-based incentive contracts can be economically efficient, even when not all tasks can be incentivized. 

Beard, Mary, (2015). SPQR: A History of Ancient Rome. United Kingdom: Liveright Company. 

"Periodic auctions of specific taxation rights in individual provinces took place at Rome. The company that bid the highest then collected the taxes, and anything it managed to rake in beyond the bid was its profit.”  Beard describes some of the problems (including corruption) this system created.

Atkin, David, Azam Chaudhry, Shamyla Chaudry, Amit K. Khandelwal, and Eric Verhoogen, (2017). "Organizational barriers to technology adoption: Evidence from soccer-ball producers in Pakistan," Quarterly Journal of Economics 132(3): 1101-1164.

Studies technology adoption in a cluster of soccer-ball producers in Sialkot, Pakistan. Two field experiments of giving a new cutting waste-reducing technology to a random subset of producers show that different payment methods create different incentives: piece rates create no incentives to reduce waste, a lump-sum incentive payment leads to a significantly positive effect on adoption.

Shearer S. Bruce., Nibene H. Somé, and Bernard Fortin, (2018). “Measuring Physicians' Response to Incentives: Evidence on Hours Worked and Multitasking,” IZA Discussion Paper 11565. 

Measures the response of physicians to monetary incentives using matched administrative and time-use data on specialists from Québec (Canada). Applies data to a multitasking model of physician labor supply, measuring two distinct responses. 

Freeman, Richard B., Wei Huang, and Teng Li, (2019). “Non-linear Incentives and Worker Productivity and Earnings: Evidence from a Quasi-experiment,” No. w25507. National Bureau of Economic Research.

Uses administrative data from a major Chinese insurance firm that raised its sales targets and rewards for insurance agents greatly in 2015. Shows that increased incentives induced agents to increase sales of the increasingly incentivized life insurance products, bunched around the new targets, albeit in part with some low quality sales that led to canceled contracts, while reducing sales of products out-side the new incentive system. 

Acemoglu, Daron, Leopoldo Fergusson, James Robinson, Dario Romero and Juan F. Vargas. “The Perils of High-Powered Incentives: Evidence from Colombia's False Positives” American Economic Journal: Economic Policy 2020, 12(3): 1–43.

High-powered incentives for the Colombian military produced a perverse side effect known as “false positives” which misrepresented innocent civilians as guerillas and resulted in their deaths.  This effect of strong incentives was strongest in  municipalities with weaker judicial institutions and where a higher share of brigades were commanded by colonels, who have stronger career concerns than generals 

Athey, Susan, Kevin Bryan and Joshua Gans.  The Allocation of Decision Authority to Human and Artificial Intelligence AEA Papers and Proceedings 2020, 110: 80–84

Building on Aghion-Tirole’s (1997) multi-task agency model, Athey et al. study principals who can use both human agents and algorithms to perform tasks.  The authors study when the human or the AI should make the final decision, how incentives and tasks should be designed for both kinds of agents, what types of ‘preferences’ programmers should assign to algorithms.  When humans and algorithms work together, it can be optimal to endow algorithms with task preferences that differ from the agent’s.

Alexander, Diane. How Do Doctors Respond to Incentives? Unintended Consequences of Paying Doctors to Reduce Costs  Journal of Political Economy 2020. 128(11): 4046-4096.

In a recent program, U.S. physicians received bonuses for reducing the total hospital costs of admitted Medicare patients.  The author shows that doctors respond to the bonuses by becoming more likely to admit patients whose treatment can generate high bonuses, and by sorting healthier patients into participating hospitals.  The results highlight the ability of doctors to game incentive schemes. 

Kvaløy, Ola  and Trond E. Olsen. Balanced Scorecards: A Relational Contract Approach CESifo Working Paper No. 8922, February 2021

Balanced scorecards typically connect pay to a weighted sum of multiple performance measures. Theoretically, the authors show that such index contracts can be economically optimal under some circumstances. 

Silver-Greenberg, Jessica, and Robert Gebeloff Maggots, Rape and Yet Five Stars: How U.S. Ratings of Nursing Homes Mislead the Public  New York Times, March 13, 2021

Investigative reporting on how U.S. nursing homes ‘gamed’ a ratings system that was intended to accurately measure performance and safety.  

Abeler, Johannes, Armin Falk and Fabian Kosse. Malleability of Preferences for Honesty CESifo Working Paper No. 9033, April 2021

An important aspect of many jobs that is particularly hard to incentivize directly is telling the truth.  Fortunately, a recent literature has found that  --contrary to usual economic assumptions-- many people have a preference for honest reporting,  In an experiment on children, Abeler et al. show that these preferences for honesty can be increased by a mentoring program, with effects that last at least four years. 

Andrabi, Tahir and Christina Brown 2022 Subjective versus Objective Incentives and Employee Productivity unpublished paper, University of Chicago.

In a multi-task environment, output based incentives may backfire by leading employees to reduce effort on non-incentivized outcomes.  To test whether subjective incentives (manager-discretionary performance evaluation) can solve this problem, the authors conduct a field experiment in 230 Pakistani schools.  While both subjective and objective incentives increase students’ test scores, objective incentives decrease non-test score student outcomes relative to subjective incentives.

de Janvry, Alain, Guojun He, Elisabeth Sadoulet, Shaoda Wang and Qiong Zhang 2023 Subjective Performance Evaluation, Influence Activities, and Bureaucratic Work Behavior: Evidence from China American Economic Review 2023, 113(3): 766–799

Subjective performance evaluation could induce influence activities: employees might devote too much effort to pleasing their evaluator, relative to working toward the goals of the organization. Using a randomized field experiment among Chinese local civil servants, the authors find that civil servants do engage in influence activities by reallocating work efforts toward job tasks that are more important and observable to the evaluator. Introducing uncertainty about the evaluator’s identity reduces these activities.

Strauss, Valerie. 2015 How and why convicted Atlanta teachers cheated on standardized tests Washington Post, April 1.  (accessed March 14, 2023)

Attributes the cheating to “increasingly high stakes on standardized test score” associated with No Child Left Behind, President George W. Bush’s chief education initiative, and then Race to the Top, President Obama’s central education program.  “Such testing mandates were coupled with a ‘no excuse’ management push by school reformers who said teachers had, well, no excuse not to raise their students’ test scores.”

Tice, Frances M. 2023 The Role of Common Risk in the Effectiveness of Explicit Relative
Performance Evaluation Management Science, forthcoming.

 The author examines the effect of executives’ relative performance evaluation (RPE) on their firms’ performance and their risk-taking behavior. Consistent with their model’s predictions, RPE firms perform better than similar non-RPE firms when there is high common risk exposure and when the common risk removed by the CEO’s performance peers is high. In these circumstances, RPE also reduces the likelihood that CEO will under-invest. Thus, RPE is associated with better risk sharing and stronger incentive alignment when (1) RPE firms are exposed to high common risk and (2) the pool of RPE peer firms s is selected so as to remove common risk. 

Job Design

Gibbs, Michael. 2021 Job Design, Learning & Intrinsic Motivation  IZA DP No. 14285

The author argues that the enjoyment people derive from learning may be an important source of intrinsic motivation: Learning may make work less onerous, or the employee may value it in and of itself. Learning also interacts with multi-tasking, since jobs with multiple tasks offer more opportunities to learn.  In the paper, the author discusses the optimal design of incentive pay, and optimal job design when different tasks offer different learning opportunities and workers enjoy learning. 

Gerten, Elisa, Michael Beckmann and Matthias Kräkel 2022 “Information and Communication Technology, Hierarchy, and Job Design” IZA discussion paper no. 15491

Do advances in information and communication technology (ICT) lead to more centralization or more decentralization in firms?  The authors’ theoretical and empirical analyses show that equipping employees with ICT has more complex effects that differ across positions.  Executive employees are granted more work autonomy but also experience more control via stronger monitoring, while non-executive employees experience more monitoring without receiving more work autonomy. 

The "Gr-eight" Initiative:   Incentives gone wrong at Wells Fargo

Flitter, Emily., Binyamin Appelbaum., and Stacy Cowley, (2018). “Federal Reserve Shackles Wells Fargo after Fraud Scandal,” New York Times, Feb 2. 

Wells Fargo was punished for creating fake customers and misleading customers and government officials.

Flitter, Emily, and Glenn Thrush, (2018). “Wells Fargo Said to Be Target of $1 Billion U.S. Fine.” New York Times, Apr 19.

An expected $1 billion penalty against Wells Fargo would mark the toughest action that the Trump administration has taken against a major bank.

Kurtz, Annalyn, (2018). “Wells Fargo is paying $575 million to states to settle fake account claims.” CNN Business, Dec 28.

Since September 2016, Wells Fargo has agreed to pay $575 million to all 50 states and the District of Columbia to settle civil charges related to the bank's fake-accounts scandals.