Mental Models of Incentives

Abstract

Previous research highlights that monetary incentives can influence employee effort through a variety of different channels, leading to heterogeneous effects that can also backfire. However, little is known about how managers understand these complex incentive mechanisms, even though managers’ beliefs about how incentives work are key for the adoption of incentive schemes. In this paper, I shed light on the mental models of monetary incentives, i.e., the subjective understanding of how and why monetary incentives and employee effort are related, in two different samples, current employees from the USA (incl. employees that report having managerial responsibilities) and prospective top managers. Current employees are recruited via Prolific, an online research platform often used in economic research, while prospective top managers are current MBA students at one of the world’s leading business schools. I focus on three questions: what are the different mental models that employees and prospective top managers hold, where do the mental models come from, and how are they related to adoption behavior. Results from the currently ongoing data collection show that mental models of incentives are highly heterogeneous. On the one hand, some employees and prospective top managers hold mental models in line with classical principal-agent theory, believing that an agent needs to be incentivized with a performance-based bonus (even if it is tiny) to induce effort. Others believe in a behavioral-type model, i.e., that agents react positively to higher unconditional incentives. An analysis of the qualitative reasoning data reveals different mechanisms that can be mapped to previous theoretical and empirical work on incentives. Moreover, preliminary results suggest that mental models are related to respondents’ background and work experience.