Essays on Team-based Incentives

Over the past few decades, team-based incentives are used by more and more organizations to motivate their agents to exert effort. The usage of team incentives creates many challenges, especially the “free-riding” problem. In current dissertation, I provide the evidence from the laboratory and field experiments to answer several critical questions faced by managers: Given the potency of free-riding and without task complementary, could team-based incentives be at least as effective as individual-based incentives or even better? If so, under what condition would the team-based incentives be effective? Furthermore, what are the driving forces that make team-based incentives effective? In essay 1, I focus on the piece rates compensation scheme. Specifically, I examine three types of incentives: Individual incentive where agents are paid by a commission rate purely on their individual output; Team-based incentive where agents are paid by a commission rate on the weighted average of individual output and team output (the average of output of all the members in the team). Team-based incentive can be further categorized as Team incentive when the weight of individual output is zero and Hybrid incentive with the weight greater than zero but less than one. I find that team-based incentives could be as effective as individual-based incentives under certain environment. More important, changing the structure of team-based incentives by varying the proportion of individual output and team output can make team-based incentives even more effective. Last, appropriate mutual monitoring is helpful but “perfect” mutual monitoring may induce negative effect on agents’ effort. In essay 2, I compare the efficacy of team-based versus individual-based incentives using economic experiments, answering the following question: when designing contests to motivate employees, should managers organize employees to compete in teams or as individuals? I develop a behavioral economics model that shows that if contestants are averse to being responsible for their team’s loss, a team-based contest can yield higher effort as compared to an individual-based contest. I test this prediction for a four-person contest using a laboratory economics experiment. The results show that when contestants do not know each other, average effort levels in the individual-based and team-based contests are no different. However, when I allow contestants to socialize with potential teammates before making effort decisions, team-based contests yield higher effort relative to individual-based contests. I also conduct a field experiment that compares team-based and individual-based contests in a setting where contestants are familiar with one another. The results parallel those from the lab and indicate that team-based contests generate higher sales.