Description:

Christina Brown (Chicago): Subjective versus Objective Incentives and Employee Productivity
 
Abstract: A central challenge facing firms is how to incentivize employees. While objective incentives may be theoretically ideal, in practice they may lead employees to reduce effort on non-incentivized outcomes and may fail in settings where effort is weakly tied to outcomes. Subjective (manager-discretionary) incentives are hence the norm for the vast majority of employees. However, whether manager discretion is able to overcome this noise and distortion problem is unclear and may even perform worse than objective incentives if managers are inaccurate in their evaluations.  We study the effect of subjective incentives (manager-discretionary performance evaluation) and objective incentives (test score-based) relative to no incentives for teachers using an RCT in over 200 Pakistani schools. First, we show that subjective and objective incentives both increase test scores and have similar magnitude effects. However, objective incentives decrease non-test score student outcomes relative to subjective incentives. Second, we show that teachers' effort response is very different under each scheme, with attendance increasing under subjective and teaching quality decreasing under objective. Finally, we rationalize these effects through the lens of a moral hazard model with multi-tasking. We show teachers believe objective incentives are a noisier function of their effort than subjective incentives, and objective incentives distort effort toward narrow aspects of student learning. Then we use within-treatment variation to isolate the causal effect of contract noise and distortion. We show that noisier incentive schemes lead to a smaller effort response and distorted incentives shift teacher effort to certain actions. Combined, differences in the perceived noise and distortion of subjective versus objective incentives can explain a majority of the difference in reduced form effects between the two contract types.