Incentive Design

Interesting Slate article by Tim Harford on apple-picking incentives. How you pay people has an impact on productivity. Big surprise! But seriously, it's often not obvious how to design incentives. The article describes experiments in setting rates, supervisor incentives and teamwork.

Wall St. Incentives Misaligned?

The trick with incentive design is to design incentives that elicit the behavior you want. Wall St. is famous for the huge bonuses paid - running into the millions of dollars per year. The problem is that bonuses are paid annually, encouraging people to make risky investments and collect their bonuses before the investments later collapse. As the New York Times explained on December 18, 2008, people don't give their bonuses back, yet investors have to soak up the loss1 There's a timing problem. That problem is partly solved when employees are paid in stock, but many have a large cash component that they get to keep, even if the deal turns out ultimately to be worthless.

Surprise! Physician Behavior is Influenced by Financial Incentives

There is evidence that physicians with their own diagnostic imaging facilities tend to "self-refer" and request much higher levels of imaging services than physicians that do not have their own facilities. This is obviously a factor in high health care costs.

Drug Companies are Starting to get Paid for Performance

Some drug companies are signing contracts with customers where the price paid depends on the drug's performance2.

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