2006-2009, Jeroen van de Ven

Rewards, Feedback, and Motivation: A Game-theoretic Analysis

In economic theory, the use of rewards is a basic ingredient to solve incentive problems. Whenever two parties, such as an employer and a worker, have conflicting objectives, their incentives can be aligned by an appropriate reward scheme. However, the economics literature takes a relatively narrow view on the effects of rewards. This research project aims at integrating insights from cognitive psychology into economic theory.

Current economic theory is built around the notion that rewards directly motivate people because they like to get money. Cognitive psychologists have identified more indirect impacts of rewards on motivation. They argue that rewards might have informational content. For instance, a high reward can give positive feedback to the agent if it shows that the principal appreciates past performance. This feedback boosts his self-confidence and thereby indirectly also his motivation. Likewise, a high reward can just as well give negative feedback: a principal that has little confidence in an agent is more likely to promise a high reward to motivate him.

The proposed research endeavors to develop and test a theory of incentives that incorporates such informational aspects of rewards. The focus is on situations where the principal knows more about, say, the difficulty of a task than the agent. This private information generally affects the type of rewards used, and this enables the agent to learn something from the rewards he gets. This novel idea was first introduced by Bénabou and Tirole [2003] and further developed by the applicant (Suvorov and Van de Ven [2004]). This leads to very different results from standard economic predictions and it can account for some important existing theoretical and empirical puzzles. Motivated by these earlier results, this research project further develops and extends the analysis in the direction of teamwork, promotional policies, and more complex types of contracts.