I study the optimal design of monetary incentives in experiments where incentives are a treatment variable. I propose a novel framework called the Budget Minimization problem in which a researcher chooses the level of incentives that allows her to detect a predicted treatment effect while minimizing her expected budget. The Budget Minimization problem builds upon the power analysis and structural modeling. It extends the standard optimal design approach by explicitly incorporating the budget as a part of the objective function. I prove theoretically that the problem has an interior solution under fairly mild conditions. To showcase the practical applications of the Budget Minimization problem, I provide examples of its implementation in several well-known experiments. I also offer a practical guide to assist researchers in utilizing the proposed framework. The Budget Minimization problem contributes to the experimental economists’ toolkit for an optimal design, however, it also challenges some conventional design recommendations.

Efficient coordination is a major source of efficiency gains. We study in an experimental coordination game with 727 children and teenagers, aged 9 to 18 years, the strategies played in pre-adulthood. In our one-shot, experimental coordination game, we vary the incentives for reaching the more efficient equilibrium and the number of subjects within a group. Looking at strategy choices dependent on age, we do not find robust age effects in the aggregate. Yet, we see that smaller group sizes and larger incentives increase the likelihood of choosing the efficient strategy. The larger strategic uncertainty in larger groups is obviously harmful for overall efficiency. Regarding incentives, we find that increasing the profits in the efficient equilibrium seems to work better than providing a cushion in case of miscoordination. Beliefs play an important role as well, as subjects are more likely to play the efficient strategy when they expect others to do so as well. Our results are robust to controlling for individual risk-, time-, and social preferences.

A key challenge when surveying political elites is recruitment. Low response rates can lead to biased samples and underpowered designs, threatening the validity of descriptive and experimental scholarship. In a randomized control trial, we test the effects of sending postal invitations in a large survey of local elected officials. We find that German and UK local politicians are more likely to complete the survey if invited by postal mail, rather than simply by email. Recruitment mode does not impact the quality of responses but shapes the population of local officials recruited. Officials invited via postal letter were more likely to come from smaller municipalities and less likely to have a college degree. Costs per response are relatively high but can be reduced as we learn more about selection into elite surveys.

A growing number of studies use “real” effort designs for laboratory experiments where subjects complete an actual task to exert effort rather than using a stylized effort design where subjects simply choose an effort level from a predefined set. The commonly argued reason for real effort is that it makes the results more generalizable and field relevant. We investigate the nature of modeling effort provision by first trying to provide a clear theoretical understanding of the nature of effort costs. We then empirically examine claims about the differences between real effort and stylized effort. A key to our examination is ensuring that we compare the two modes of effort provision keeping effort costs constant, which is a point overlooked in many past examinations. In our data, when controlling for effort costs, we find no differences in behavior between real and stylized effort. Given the importance of effort costs and the lack of a generally accepted way to include them in real effort designs, we provide a simple add-on that any researcher can use with their real effort experiments to incorporate a theoretically appropriate and controlled cost of effort even in a real effort setting. We also discuss ways to better approach modeling effort costs in experiments, whether one is conducting real or stylized designs, to improve inference on research questions.

Motivated by problems of coordination failure in organizations, we examine how overcoming coordination failure and maintaining coordination depend on the ability of individuals to observe others’ choices. Subjects’ payoffs depend on coordinating at high effort levels in a weak-link game. Treatments vary along two dimensions. First, subjects either start with low financial incentives for coordination, which typically leads to coordination failure, and then are switched to higher incentives or start with high incentives, which usually yield effective coordination, and are switched to low incentives. Second, as the key treatment variable, subjects either observe the effort levels chosen by all individuals in their experimental group (full feedback) or observe only the minimum effort (limited feedback). We find three primary results: (1) When starting from coordination failure the use of full feedback improves subjects’ ability to overcome coordination failure, (2) When starting with good coordination the use of full feedback has no effect on subjects’ ability to avoid slipping into coordination failure, and (3) History-dependence, defined as dependence of current effort levels on past incentives, is strengthened by the use of full feedback.

Coordinating activity among members is an important problem faced by organizations. When firms, or units within firms, are stuck in bad equilibria, managers may turn to the temporary use of simple incentives—flat punishments or rewards—in an attempt to transition the firm or unit to a more efficient equilibrium. We investigate the use of incentives in the context of the “minimum-effort,” or “weak-link,” coordination game. We allow groups to reach the inefficient equilibrium and then implement temporary, flat, “all-or-none” incentives to encourage coordination on more efficient equilibria. We vary whether incentives are positive (rewards) or negative (penalties), whether they have substantial or nominal monetary value, and whether they are targeted to a specific outcome (the efficient equilibrium) or untargeted (apply to more than one outcome). Overall, incentives of all kinds are effective at improving coordination while they are in place, but there is little long-term persistent benefit of incentives—once incentives are removed, groups tend to return to the inefficient outcome. We find some differences between different kinds of incentives. Finally, we contrast our results to other recent work demonstrating greater long-term effectiveness of temporary incentives.

We conduct a laboratory experiment among male participants to investigate whether rewarding schemes that depend on work performance—in particular, tournament incentives—induce more stress than schemes that are independent of performance—fixed payment scheme. Stress is measured over the entire course of the experiment at both the hormonal and psychological level. Hormonal stress responses are captured by measuring salivary cortisol levels. Psychological stress responses are measured by self-reported feelings of stress and primary appraisals. We find that tournament incentives induce a stress response whereas a fixed payment does not induce stress. This stress response does not differ significantly across situations in which winners and losers of the tournament are publically announced and situations in which this information remains private. Biological and psychological stress measures are positively correlated, i.e. increased levels of cortisol are associated with stronger feelings of stress. Nevertheless, neither perceived psychological stress nor elevated cortisol levels in a previous tournament predict a subsequent choice between tournaments and fixed payment schemes, indicating that stress induced by incentives schemes is not a relevant criterion for sorting decisions in our experiment. Finally, we find that cortisol levels are severely elevated at the beginning of the experiment, suggesting that participants experience stress in anticipation of the experiment per se, potentially due to uncertainties associated with the unknown lab situation. We call this the novelty effect.

We use different incentive schemes to study truth-telling in a die-roll task when people are asked to reveal the number rolled privately. We find no significant evidence of cheating when there are no financial incentives associated with the reports, but do find evidence of such when the reports determine financial gains or losses (in different treatments). We find no evidence of loss aversion in the standard case in which subjects receive their earnings in a sealed envelope at the end of the session. When subjects manipulate the possible earnings, we find evidence of less cheating, particularly in the loss setting; in fact, there is no significant difference in behavior between the non-incentivized case and the loss setting with money manipulation. We interpret our findings in terms of the moral cost of cheating and differences in the perceived trust and beliefs in the gain and the loss frames.

Monetary incentives are a procedural pillar in experimental economics. By applying four distinct monetary incentive schemes in three experimental finance applications, we investigate the impact of an incentive scheme’s salience on results and elicit subjects’ perception of the experienced scheme. We find (1) no differences in results between salient schemes but a significant impact if the incentive scheme is non-salient. (2) The number of previous participations has a significant impact on the perception of the incentive scheme by subjects: it strongly correlates with subjects’ motives for participation, positively contributes to subjects’ understanding of the incentive scheme, but has no influence on subjects’ motivation within the experiment. (3) Subjects favor more salient over less- or non-salient schemes in the gain domain and negatively evaluate high salience in the loss domain.

We examine the incentive effects of funding contracts on entrepreneurial effort and on allocative efficiency. We experiment with funding contracts that differ in the structure of investor repayment and, thus, in their incentives for the provision of entrepreneurial effort. Theoretically the replacement of a standard debt contract by a repayment-equivalent non-monotonic contract reduces effort distortions and increases efficiency. Likewise, distortions can be mitigated by replacing outside equity by a repayment-equivalent standard-debt contract. We test both hypotheses in the laboratory. Our results reveal that the incentive effects of funding contracts must be experienced before they are reflected in observed behavior. With sufficient experience, observed behavior is either consistent with or close to theoretical predictions and supports both hypotheses. If we allow for entrepreneur-sided manipulations of project outcomes, we find that non-monotonic contracts lose much of their appeal.

I study the effect of task difficulty on workers’ effort. I find that task difficulty has an inverse-U effect on effort and that this effect is quantitatively large, especially when compared to the effect of conditional monetary rewards. Difficulty acts as a mediator of monetary rewards: conditional rewards are most effective at the intermediate or high levels of difficulty. The inverse-U pattern of effort response to difficulty is inconsistent with many popular models in the literature, including the Expected Utility models with the additively separable cost of effort. I propose an alternative mechanism for the observed behavior based on non-linear probability weighting. I structurally estimate the proposed model and find that it successfully captures the behavioral patterns observed in the data. I discuss the implications of my findings for the design of optimal incentive schemes for workers and for the models of effort provision.