Real incentives really matter

Abstract: 

Incentivizing behavior, a core principle of economic experiments, is currently under scrutiny due to a series of papers that find little to no difference in choices made under real or hypothetical incentives. We experimentally assess the effectiveness of hypothetical incentives to induce participants’ real effort – an integral aspect of reliable experimental data. We find that although linking behavior to hypothetical incentives generates modest additional effort compared to no reference to such incentives, hypothetical incentives fall substantially short of real ones, even when their nominal value is radically inflated. To understand the mechanism behind these effects, we systematically vary base pay and piece-rate magnitudes across incentive conditions and structurally estimate a model of costly effort. Although higher base pay increases effort both by increasing non-pecuniary motivation and by enhancing responsiveness to hypothetical incentives, incentive-compatible real payments are far more cost-effective.