We present evidence on whether workers have social preferences by comparing workers ’ productivity under relative incentives, where individual effort imposes a negative externality on others, to their productivity under piece rates, where it does not. We find that the productivity of the average worker is at least 50 percent higher under piece rates than under relative incentives. We show that this is due to workers partially internalizing the negative externality their effort imposes on others under relative incentives, especially when working alongside their friends. Under piece rates, the relationship among workers does not affect productivity. Further analysis reveals that workers internalize the externality only when they can monitor others and be monitored. This rules out pure altruism as the underlying motive of workers ’ behavior. We have benefited from discussions with Heski Bar-Isaac, V. Bhaskar, Timothy Besley, Marianne Bertrand,

Much of the existing theory of incentives describes a static relationship that lasts for just one transaction. This static assumption is not only unrealistic, but the resulting predictions appear to be at odds with many work organizations. The current paper introduces possible long-term interaction among agents, and studies how the design of explicit incentives and work organizations can exploit, and interact with, the implicit incentives generated by the repeated interaction of hc agents. The-optimal incentive scheme is shown to display many observed features of the increasingly popular "teams," such as low-powered, group incentives, and the use of self monitoring and decentralization of authority among team members.

We examine the impact of community interaction on risk sharing, investments and consumption. We do this using a rational general equilibrium model in which agents care only about their personal consumption. We consider a setting in which, due to borrowing constraints, individuals who are endowed with local resources under-participate in financial markets. As a result, individuals “compete ” for local resources through their portfolio choices. Even with complete financial markets (in the sense of spanning) and no aggregate risk, in stable equilibria agents herd into risky portfolios. This yields a Pareto dominated outcome as agents introduce “community ” risk that does not follow from fundamentals. This framework allows us to examine the influence of behavioral agents on the equilibrium portfolio choices of other agents in the community. We show that when some agents are behaviorally biased, equilibria exist in which rational agents choose even more extreme portfolios and amplify the behavioral effect. This can rationalize the behavioral bias, as following the behavioral bias is optimal. A similar effect will result if some investors cannot completely diversify their holdings (for control or moral hazard reasons) and are biased towards a certain sector. Finally, we show that in our model, equilibrium Sharpe ratios can be high, even absent aggregate consumption risk. We also show that from a welfare perspective diversification has “public good ” features. This provides a potential justification for policies that subsidize diversified holdings and limit trade in risky securities.

We study a contest with multiple (not necessarily equal) prizes. Contestants have private information about an ability parameter that affects their costs of bidding. The contestant with the highest bid wins the first prize, the contestant with the second-highest bid wins the second prize, and so on until all the prizes are allocated. All contestants incur their respective costs of bidding. The contest’s designer maximizes the expected sum of bids. Our main results are: 1) We display bidding equlibria for any number of contestants having linear, convex or concave cost functions, and for any distribution of abilities. 2) If the cost functions are linear or concave, then, no matter what the distribution of abilities is, it is optimal for the designer to allocate the entire prize sum to a single ”first” prize. 3) We give a necessary and sufficient conditions ensuring that several prizes are optimal if contestants have a convex cost function.

In the run-up to elections in a large Indian city, residents in a random sample of slums received newspapers containing report cards on politicians. The report card for a jurisdiction presented information, obtained under India’s disclosure laws, on performance of the incumbent legislator and qualifications of the incumbent and two main challengers. Relative to the control slums, treatment slums saw higher turnout, reduced vote buying and higher voteshare for better performing and relatively more qualified incumbents. Moreover, voters demonstrated sophistication in how they use report card information to judge performance and qualifications – they used their knowledge on incidence of public good spending in slums to evaluate jurisdiction-level information on public good spending by the incumbent and used challenger qualifications as a yardstick to judge incumbent qualifications. The authors are from MIT (Banerjee), Carnegie Mellon University (Kumar) and Harvard University (Pande). We thank our partners Satark Nagrik Sangathan, Delhi NGO Network and Hindustan and especially Anjali

Performance pay for teachers is frequently suggested as a way of improving education outcomes in schools, but the theoretical predictions regarding its effectiveness are ambiguous and the empirical evidence to date is limited and mixed. We present results from a randomized evaluation of a teacher incentive program implemented across a large representative sample of government-run rural primary schools in the Indian state of Andhra Pradesh. The program provided bonus payments to teachers based on the average improvement of their students' test scores in independently administered learning assessments (with a mean bonus of 3 % of annual pay). At the end of two years of the program, students in incentive schools performed significantly better than those in control schools by 0.28 and 0.16 standard deviations in math and language tests respectively. They scored significantly higher on "conceptual" as well as "mechanical" components of the tests, suggesting that the gains in test scores represented an actual increase in learning outcomes. Incentive schools also performed better on subjects for which there were no incentives, suggesting positive spillovers. Group and individual incentive schools performed equally well in the first year of the program, but the individual incentive schools outperformed in the second year. Incentive schools performed significantly better than other randomly-chosen

Despite popular belief, the marketing discipline was an offshoot of economics (Bartels 1951, Sheth et al. 1988). Early researchers, often educated in economics, felt economics was preoccupied with variables such as prices and costs. They focused on other variables. They also investigated marketing as a productive activity (i.e., adding value) by adopting different sets of assumptions other than economics (Bartels 1976). Were profit variations across firms caused entirely by random exogenous factors beyond managerial control, marketing would have no ‘‘valueadded,’’ and the discipline of marketing would have diminished purpose. Mathematical marketing models appeared much later as a precise, logical and scientific way to ‘‘add value.’ ’ By 1970, researchers developed mathematical models for many purposes, including better forecasting, integration of data, and understanding of markets. Just a few of the many high-impact pre-1970 marketing models include those of Bass (1969a,

Proposals to use teachers' performance incentives as the basis for school reforms have recently attracted considerable attention and support among researchers and policy makers. The main message is that the most likely way to improve students' achievements is to institute performance incentives, direct monetary rewards for improvements in student outcomes. However, there has been very little experience with applying performance incentives in schools. This paper provides empirical evidence on the causal effect of a program that offered monetary incentives to teachers as a function of their students' achievements. The program offered incentives to schools in the form of performance awards, part of which were distributed to teachers and school staff as merit pay and the rest, for the well-being of teachers in the school. I evaluate the effect of the program during the first two full academic years of its implementation, 1996 and 1997. Since participating schools were not chosen randomly, ...

We consider a single buyer who wishes to outsource a fixed demand for a manufactured good or service at a fixed price to a set of potential suppliers. We examine the value of competition as a mechanism for the buyer to elicit service quality from the suppliers. We compare two approaches the buyer could use to orchestrate this competition: (1) a Supplier-Allocation (SA) approach, which allocates a proportion of demand to each supplier with the proportion allocated to a supplier increasing in the quality of service the supplier promises to offer, and (2) a Supplier-Selection (SS) approach, which allocates all demand to one supplier with the probability that a particular supplier is selected increasing in the quality of service to which the supplier commits. In both cases, suppliers incur a cost whenever they receive a positive portion of demand, with this cost increasing in the quality of service they offer and the demand they receive. The analysis reveals that (a) a buyer could indeed orchestrate a competition among potential suppliers to promote service quality, (b) under identical allocation functions, the existence of a demand-independent service cost gives a distinct advantage to SS type competitions, in terms of higher service quality for the buyer and higher expected profit for the supplier, (c) the relative advantage of SS versus SA depends on the magnitude of demand-independent versus demand-dependent service costs, (d) in the presence of a demand-independent service cost, a buyer should limit the number of competing suppliers under SA competition but impose no such limits under SS competition, and (e) a buyer can induce suppliers to provide higher service levels by selecting an appropriate allocation function. We illustrate the impact of these results through three example applications. 1

In many tournaments investments are made over time. The question whether to conduct a review once at the end, or additionally at points midway through the tournament, is a strategic decision. If the latter course is chosen, then the designer must establish both a rule for aggregating the results of the different reviews and a rule for determining compensations. We first study the case of a fixed, exogenously given prize and then extend the analysis to case where the prize is not fixed but may vary with the tournament’s outcome. It is shown that (1) it is always optimal to assign a higher weight to the final review; (2) this weight increases with the dominance of the first-stage effort in determining the final review’s outcome. When the prize is not fixed, the optimal design generates an asymmetric tournament in the second stage that favors the winner of the midterm review. JEL Classification: C72, D86, J41 We wish to thank Maya Eden and Paul Schweinzer for helpful conversations and the two anonymous referees of this journal for their invaluable comments. We gratefully acknowledge financial support from the ESRC ES/E024483/1 and the Falk institute. 1 1