Abstract:
We use decision making experiments to study the impact of different pay schemes and feedback on performance and learning in a cognitively challenging task. In each of multiple rounds, subjects are presented with two cue values, Cue A and Cue B, and asked to predict the value of a third variable X, which is derived from a function of the two cue values. We measure performance with the forecast error of the prediction, the absolute difference between the actual and predicted values of X. Our pay schemes include: (1) piece rates, where subjects are paid on the basis of only their own performance; (2) a two-person winner-takes-all-tournament, where subjects are paired and the one with the highest performance earns a positive payoff while the other earns nothing; and 3) a fixed salary, where subjects are paid a flat lump-sum amount regardless of their performance. These pay schemes make up three of our experimental treatments: the Piece Rate, Tournament and Salary treatments. In our fourth treatment – the Piece Rate Win Lose treatment – we investigate the role of relative performance feedback by paying people piece rates based on their own performance, while informing them about whether they performed better or worse than a random partner. We find that the Piece Rate Win Lose and Salary treatments perform better than the Piece Rate and Tournament treatments, with no difference in performance between the former and latter two treatments. However, we only observe significant learning in the Tournament treatment.