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Tuesday, January 05, 2010

''The Behavioralist Visits the Factory''

A test of prospect theory:

The Behavioralist Visits the Factory: Increasing Productivity Using Simple Framing Manipulations, by Tanjim Hossain, John A. List, NBER Working Paper No. 15623, Issued in December 2009: Abstract: Recent discoveries in behavioral economics have led to important new insights concerning what can happen in markets. Such gains in knowledge have come primarily via laboratory experiments—a missing piece of the puzzle in many cases is parallel evidence drawn from naturally-occurring field counterparts. We provide a small movement in this direction by taking advantage of a unique opportunity to work with a Chinese high-tech manufacturing facility. Our study revolves around using insights gained from one of the most influential lines of behavioral research—framing manipulations—in an attempt to increase worker productivity in the facility. Using a natural field experiment, we report several insights.

This paragraph from the introduction describes the experiment:

During our experiment, which lasted almost six months in total, subjects engaged in their regular tasks, and had standard work schedules. As per company policy, the bonus incentives were paid in addition to the base income, and employees were notified of the bonuses via personal letters. The main insights gained in the experiment come from a comparison of productivity measures across a baseline and two treatments: in the positively framed bonus ("reward") treatment employees are notified that if the week’s average per-hour production reaches a certain threshold, a bonus is paid at the end of the pay period. In the negatively framed bonus ("punishment") treatment, employees are provisionally given the bonus before the work week begins, but are notified that if the average per-hour production does not reach a certain threshold, it is retracted at the end of the pay period. In this way, the bonus schemes are isomorphic, except for the frame. Nevertheless, prospect theory conjectures that since losses loom larger than gains, the punishment treatment should outperform the reward variant. Alternatively, if workers are more invigorated by positive incentive schemes, the reward treatment should lead to a higher level of productivity.

Back to the abstract:

...conditional incentives framed as both “losses” and “gains” increase productivity for both individuals and teams. In addition, teams more acutely respond to bonuses posed as losses than as comparable bonuses posed as gains. The magnitude of the effect is roughly 1%: that is, total team productivity is enhanced by 1% purely due to the framing manipulation. Importantly, we find that neither the framing nor the incentive effect lose their importance over time; rather the effects are observed over the entire sample period. Moreover, we learn that worker reputation and conditionality of the bonus contract are substitutes for sustenance of incentive effects in the long-run production function.

    Posted by on Tuesday, January 5, 2010 at 01:44 PM in Academic Papers, Economics | Permalink  TrackBack (0)  Comments (11)

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