In standard economic theory, financial incentives affect agents’ effort on the-job and selection into-the-job by increasing the payoff from accomplishing a task. Recent theory suggests that, in the presence of incomplete information, financial incentives can also affect agents’ behaviour through a signal channel(Benabou and Tirole 2003, Sliwka 2007). Paying a person a lot of money to perform a task might signal that the task is hard or unpleasant, or that it has other specific features.
I conduct the first field experiment that illustrates the signal channel of financial incentives (Deserranno 2014). In a context with incomplete information, I show that the signal conveyed by incentives strongly affects the number and the types of agents who apply for a job and, through this, the performance of the organisation.
I collaborate with the NGO BRAC during the recruitment campaign for a newly created Health Promoter position in 315 rural villages of Uganda. The position consists of a social and a business component – agents provide basic health services but also sell commodities to their community and are remunerated for these sales. As the position is new in the villages, candidates are unable to exactly know ex-ante the relative importance of the two components, the intentions of BRAC, the difficulty of the tasks, etc. This context is thus ideal to illustrate whether incentives affect the perception of the job.
At the recruitment stage, I create village-level experimental variation in expected earnings for the position and use this to illustrate the effect of financial incentives on (1) the candidates’ perception of the job, (2) the size and composition of the applicant pool and the pool of appointed candidates, and (3) the performance of the organisation.
Because workers earn a profit margin for each product they sell and receive no base payment, earnings vary significantly from one worker to another. Consequently, the recruiter does not know ex-ante how much each candidate would earn if recruited. This key feature allows me to manipulate agent expected earnings by advertising the position as being High-Paying, Medium-Paying, or Low-Paying. This is done by revealing different points of the true earning distribution of existing health promoters (the maximum, the average, or the minimum of the distribution). Although the effect of the treatments on expected earnings is theoretically ambiguous, I find that the higher the point of the earning distribution revealed, the higher the expected earnings are. Theories such as salience may explain these results.
I use these treatments as a tool to create exogenous variation in earning expectations.
Candidates’ perceptions of the job
I find that stronger financial incentives signal the business-oriented nature of the job (the position is perceived as one in which a larger proportion of time is dedicated to selling products rather than providing health services). As a consequence, the perceived social output of the job decreases. Other expectations, like the expected number of working hours or the perceived difficulty of the tasks, are instead unaffected.
The applicant pool and the pool of appointed candidates
I find that stronger financial incentives attract more applicants and increase the probability of filling a vacancy. However, the negative signal they convey about social output discourages agents with strong pro-social preferences from applying.
As pro-socially motivated agents can be appointed only if they apply, the crowd-out effect at the application stage has implications for the composition of recruited workers. I find that the health promoters hired with stronger incentives are less likely to have ever worked as a health volunteer and to declare that helping the community is an important feature of a job. When asked to make a voluntary and private donation to a public health NGO (dictator game), they are significantly less likely to donate large amounts (crowd-out of high motivation) while more likely to donate nothing (crowd-in of low motivation). This is represented in Figure 1.
Figure 1. Number of health promoters recruited, by donations (n=301)
Performance of the organisation
I find that the signal conveyed by financial incentives affects the types of workers recruited. But does this matter for the organisation? To answer this question, I collected monthly data on workers’ retention and performance over the course of two years. Additionally, a survey was administered to a random sample of the health promoters’ clients.
I find that the workers who are more pro-socially motivated stay significantly longer on the job. Comparing Figure 2 (showing the number of workers retained by level of donation) to Figure 1 (number of workers recruited by level of donation), it is easy to see that most of the agents who dropped out are those who donated no money in the dictator game.
Figure 2. Number of health promoters retained 24 months after their recruitment, by donations (n=220)
I also find that workers recruited with weaker incentives perform better on a number of dimensions: they visit a larger number of households, provide more natal checks, and are more likely to target the most vulnerable households.
In contexts with incomplete information about a job, financial incentives can convey a signal about broader attributes of the job. While the type and the intensity of the signal may certainly vary from one context to another depending on the characteristics of the job, who is the recruiter, etc., the results of my paper indicate that the signal can have strong effects on the behaviour of agents and on the performance of organisations.
This article is published in collaboration with Vox EU. Publication does not imply endorsement of views by the World Economic Forum.
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Author: Erika Deserranno is a PhD Candidate in Economics, LSE; Researcher, STICERD
Image: Hays Recruitment Consultancy Section Manager Ignacio Ramos (L) interviews Vicente Balmaseda at the Hays offices in downtown Madrid. SPAIN-JOBLESS/ REUTERS/Susana Vera