Journal of Risk and Uncertainty, 19:1᎐3; 7᎐42 1999
ᮊ 1999 Kluwer Academic Publishers. Manufactured in The Netherlands.
The Effects of Financial Incentives in Experiments:
A Review and Capital-Labor-Production
COLIN F. CAMERER email@example.com
Rea and Lela G. Axline Professor of Business Economics, Di
ision of Humanities and Social Sciences
228-77, California Institute of Technology, Pasadena, CA 91125
ROBIN M. HOGARTH
Wallace W. Booth Professor of Beha
ioral Science, Graduate School of Business, Uni
ersity of Chicago,
Chicago, IL 60637
We review 74 experiments with no, low, or high performance-based financial incentives. The modal
result is no effect on mean performance though variance is usually reduced by higher payment . Higher
incentive does improve performance often, typically judgment tasks that are responsive to better effort.
Incentives also reduce ‘‘presentation’’ effects e.g., generosity and risk-seeking . Incentive effects are
comparable to effects of other variables, particularly ‘‘cognitive capital’’ and task ‘‘production’’ de-
mands, and interact with those variables, so a narrow-minded focus on incentives alone is misguided.
We also note that no replicated study has made rationality violations disappear purely by raising
Key words: Experimental economics, rationality, bounded rationality, judgment, incentives, experimen-
JEL Classification: B41, D80
The predicted effect of financial incentives on human behavior is a sharp theoreti-
cal dividing line between economics and other social sciences, particularly psychol-
ogy. The difference is manifested in alternative conventions for running experi-
ments. Economists presume that experimental subjects do not work for free and
work harder, more persistently, and more effectively, if they earn more money for
better performance. Psychologists believe that intrinsic motivation is usually high
enough to produce steady effort even in the absence of financial rewards; and
while more money might induce more effort, the effort does not always improve
performance, especially if good performance requires subjects to induce sponta-
neously a principle of rational choice or judgment, like Bayes’ rule.