Cooperation, Free-riding, and the Signaling Value of Incentives: an Experiment in a Company

Marvin Deversi (LMU Munich)

Abstract : Economists and management scholars have argued that the scope of incentives to increase cooperation in organizations is limited as their use signals the prevalence of free-riding among employees. This paper tests this hypothesis experimentally, using a sample of managers and employees (N = 449) from a large software company. In the experiment, I exogenously vary whether managers are informed about prevailing cooperation levels among employees before they can set incentives to promote cooperation. Comparing informed versus uninformed incentive choices, the data reveals strong positive effects of incentives that are unaffected by the hypothesized signaling effect. The absence of such effect seems related to the perception of managers’ intentions, a mitigating factor that has not been explored in the literature so far.

Recognition Incentives for Internal Crowdsourcing: a Field Experiment at Nasa

Jana Gallus (University of California, Los Angeles)
Olivia S. Jung (Harvard Business School)
Karim R. Lakhani (Harvard Business School)

Abstract : Internal crowdsourcing, a peer-based approach to innovation, has great potential for organizations. Yet, as we show, the tensions between organizational hierarchy and peer-based crowdsourcing can create barriers for employee engagement. In their search for incentives to overcome these barriers, should organizations use incentives that are congruent with their established hierarchical structures, or should they use incentives that are aligned with the aspirational, peer-based approach to innovation? We partnered with NASA for a qualitative study and a field experiment (N=7,455). First, we show that concerns about the legitimacy of platform engagement disincentivize employees. Second, we find that managerial recognition, the incentive that is congruent with the established hierarchy, significantly increases platform engagement. It does so by alleviating legitimacy concerns and by offering managerial attention. Peer recognition, which is congruent with the peer-based approach to innovation, is not found to have a significant overall effect. However, workers who are otherwise less visible were positively motivated by it.

Capital (mis)allocation and Managerial Incentives

Alexander Schramm (University of Munich)
Alexander Schwemmer (University of Munich)
Jan Schymik (University of Mannheim)

Abstract : We study how firm investment policies and the allocation of capital are shaped by managerial incentives. Using the introduction of an accounting reform in the U.S. as a quasi-natural experiment that effectively shortened the horizon of managerial incentives for some firms (FAS 123R) we present reduced form empirical evidence on the relation between managerial incentives and firm investment policies. Based on a within-firm estimator that uses variation across investments with different durabilities, we find evidence that firms with more short-term incentives systematically shift their expenditures towards investments with a shorter durability and lower the durability of firms' capital stock. To rationalize the empirical findings and to quantify the impact of incentive distortions on output, investment and misallocation we then build a dynamic model of firm investments in which managers determine investment policies. We show that equity-based compensation contracts can induce managers to make investment decisions corresponding to quasi-hyperbolic time preferences such that there is systematic overinvestment in assets with shorter durability. The model illustrates that the relatively small deviations in managerial incentives caused by the accounting reform lead to substantial output and investment distortions within and across firms.