Positive versus negative incentives for loan repayment in microfinance: A game theory approach

In most of the methodologies used so far by microfinance institutions, negative incentives are predominant, which can contrast with these institutions’ social mission. This paper investigates whether the microfinance industry could benefit from using more positive incentives. The main results of our game model are twofold. First, (positive or negative) incentives increase “on‐time” repayments. Second, the client is more likely to repay her loan with the encouragement of a bonus scheme rather than under the pressure of a sanction, regardless of the amount. This paper therefore argues for the increased use of positive incentives in the industry.     

Rewards and Sanctions and the Provision of Public Goods in One-Shot Settings

A burgeoning literature in experimental studies of the Voluntary Contribution Mechanism focuses on the ability of institutions that allow the monitoring, sanctioning, and/or rewarding of others to facilitate cooperation. In this paper rewards and sanctions are examined in a one-shot VCM setting that so far has been unexplored in the literature. The study finds that while some subjects are willing to reward and sanction others at a personal cost, the opportunity to reward or sanction is ineffective in facilitating cooperation relative to previous experiments in which a repeated game environment is employed. The study also compares behavior in an environment in which the imposition of rewards and sanctions is certain to an environment in which imposition is uncertain. The expected value of the reward or sanction is kept constant across environments to focus simply on the effect of uncertainty about imposition. Uncertainty does not change behavior in a significant way, either in the level of cooperation or the willingness of individuals to impose rewards or sanctions.     

Identification of Dynamic Models of Rewards Programme

“Frequent‐buyer” rewards programmes are commonly used by companies as a marketing tool to compete for market share. They provide a unique environment for studying consumers’ forward‐looking behaviour. The consumer's problem on accumulating reward points can be formulated as a stationary infinite horizon discrete choice dynamic programming model. We show that the parameters of this model, including the discount factor, are well‐identified. In particular, it is possible to identify state‐dependent discount factors (i.e. discount factors can vary with the number of reward points). We discuss how this identification result is related to the goal‐gradient hypothesis studied in the consumer psychology literature.     

Promises and lies: can observers detect deception in written messages

We design a laboratory experiment to examine predictions of trustworthiness in a novel three-person trust game. We investigate whether and why observers of the game can predict the trustworthiness of hand-written communications. Observers report their perception of the trustworthiness of messages, and make predictions about the senders’ behavior. Using observers’ decisions, we are able to classify messages as “promises” or “empty talk.” Drawing from substantial previous research, we hypothesize that certain factors influence whether a sender is likely to honor a message and/or whether an observer perceives the message as likely to behonored: the mention of money; the use of encompassing words; and message length. We find that observers have more trust in longer messages and “promises”; promises that mention money are significantly more likely to be broken; and observers trust equally in promises that do and do not mention money. Overall, observers perform slightly better than chance at predicting whether a message will be honored. We attribute this result to observers’ ability to distinguish promises from empty talk, and to trust promises more than empty talk. However, within each of these two categories, observers are unable to discern between messages that senders will honor from those that they will not.     

“Interest Rate Trap”, or Why Does the Central Bank Keep the Policy Rate Too Low for Too Long?

In this paper, we provide a framework for modeling one risk‐taking channel of monetary policy, the mechanism whereby financial intermediaries' incentives for liquidity transformation are affected by the central bank's reaction to a financial crisis. The anticipation of the central bank's reaction to liquidity stress gives banks incentives to invest in excessive liquidity transformation, triggering an “interest rate trap” – the economy will remain stuck in a long‐lasting period of suboptimal, low interest rate equilibrium. We demonstrate that interest rate policy as a financial stabilizer is dynamically inconsistent, and the constrained efficient outcome can be implemented by imposing ex ante liquidity requirements.     

Leader Survival and Cabinet Change

Political leaders face both internal and external threats to their tenure as leaders. To retain office leaders need mass support, for instance to win elections. However, they also need to deal with potential internal party rivals. Using a game theoretic model, we examine how the incentives created by these competing pressures affect the retention of ministers across different political systems. Since non‐democratic leaders face relatively little threat from the masses, their concern is to reduce internal party risk. Therefore, they remove high performing ministers and retain mediocre and poor performers. As it becomes easier for the masses to replace the party in power, leaders must tradeoff internal and external threats. Retaining competent leaders improves party performance but generates an internal party rival.     

On the (in)effectiveness of rewards in sustaining cooperation

We study the effectiveness of costly rewards in mitigating excess extraction in a standard Common Pool Resource (CPR) game experiment. We implement two treatments. In the first, rewards are a pure transfer from one player to the other. In the second, the benefits of receiving a reward are higher than the cost of providing it. Referring to the latter as “net positive” rewards, we observe that these are used more frequently than transfer rewards, and that, unlike transfer rewards, they are effective in sustaining cooperation in the CPR game. JEL Classification C72, C92, D74     

Risk adjustment and prevention

Abstract Widespread integration of market‐based incentives into healthcare systems calls for – and has elicited – increasing adoption of risk adjustment. By deterring selection, risk adjustment helps to assure fair and efficient payments among health insurers or capitated provider groups. However, since conventional risk adjustment allocates funds among regions or insurers according to current population health status, it does not reward – indeed, it penalizes – preventive efforts that improve population health. This prevention penalty of risk adjustment represents a hidden cost of unclear magnitude, undermining provider incentives for health promotion. We develop a theoretical model of selection and prevention demonstrating this problem with conventional risk adjustment and suggesting a simple alternative: risk adjustment should be linked to pay‐for‐performance for prevention.     

Exploring Ambiguity and Familiarity Effects in The “Earnings Game” Between Managers and Investors

Prior evidence suggests that managers and investors play an earnings game in which managers bias their earnings forecasts downward as the earnings announcement date approaches. Knowing managers’ incentives to provide biased guidance, investors still revise their expectations downward helping to create “positive earnings surprises.” Using a 2 (ambiguity) × 2 (familiarity) between subject randomized experimental design where MBA students playing the roles of manager and investor answer a series of questions related to earnings guidance, we investigate whether earnings environment ambiguity and manager-investor familiarity influence behavior during the “earnings game.” In general, results from this study suggest that ambiguity contributes to managers’ propensity to mislead and investors’ propensity to follow, and a false sense of familiarity may amplify investors’ reliance on managers’ guidance.     

Policymakers' horizon and the sustainability of international cooperation

This paper examines the impact of policymakers' horizon on the sustainability of international cooperation. We describe a prisoners' dilemma game between two infinitely-lived countries run by policymakers. We show that re-election incentives can act as a discipline device, making it easier to sustain cooperation between policymakers with finite but potentially renewable mandates than between infinitely-lived policymakers. We also show that, when voting suffers from a recency bias, policymakers may have incentives to “collude” to get re-elected and term limits may help international cooperation.     

Lab and framed lab versus natural experiments: Evidence from a risky choice experiment

Some recent papers have studied data from TV game shows to examine the behaviour of individuals towards risk. It is generally agreed that data from these shows are useful in detecting individual risk aversion in the field, with both “real life” subjects and incentives. Field experiments also include some interesting reality features that could affect individuals’ behaviour and possibly lead to different findings. This paper aims at investigating lab versus field evidence in risk taking attitudes, especially controlling for framing effects. To assess whether the behaviour of subjects in the field is consistent with that of experimental subjects, we designed an experiment to mimic (with experimental rewards and subjects) the rules of a well-known Italian TV game show, Affari Tuoi, in two different settings: a traditional lab setting, where the game was played individually (109 subjects) (Treatment 1); and a framed lab, in which the experiment was replicated in the Italian public television (RAI) studio where the show was actually recorded, with a smaller sample of undergraduate students (33) and in the presence of an audience (Treatment 2). Our comparison between the two different settings aims at establishing whether the presence of an audience, or of a situation that reproduces the stress that contestants must experience in the TV studio, can affect experimental subjects’ choices. We did not find any significant evidence of framing effects: students behave in a similar way in the two lab settings, responding essentially to incentives. Comparing the risk attitudes shown by experimental subjects in the two lab treatments with those exhibited by the contestants in the field, we found that contestants in the TV show are generally more risk averse than students in the lab.     

The plural roots of rewards: awards and incentives in Aquinas and Genovesi

Abstract

In this economic debate, incentives (material, extrinsic) and awards (symbolic, intrinsic) are conceived as two opposite tools to prompt human actions. In this article, we provide a historical argument to problematise this opposition. We investigate the idea of prizes (“premi”) in the works of civil economist Antonio Genovesi, and its seeds in Thomas Aquinas’ thought. They both discuss if material rewards can crowd-in intrinsic motivations. Aquinas considered the crowding-out risks related to honour (award). Genovesi stressed the role of private prizes (incentives) and market in fostering the development of society, and claims that crowding-in is more common than crowding-out.     

Market Entry Regulation and International Competition*

We analyze a non‐cooperative two‐country game where each government decides whether to allow free market entry of firms or to regulate market access. We show that a Pareto‐efficient allocation may result in equilibrium. In particular, if the cost difference between home and foreign production is “significant,” production will be located in the cost‐efficient country exclusively; and if this cost difference is even “substantial,” the induced allocation is also Pareto efficient. Only if the cost difference is “insignificant,” production may take place in both countries and the allocation is inefficient.     

Sanctions that signal: An experiment

The introduction of sanctions provides incentives for more pro-social behavior, but may also be a signal that non-cooperation is prevalent. In an experimental minimum-effort coordination game we investigate the effects of the information contained in the choice to sanction. We compare the effect of sanctions that are introduced exogenously by the experimenter to that of sanctions which have been actively chosen by a subject who has superior information about the previous effort of the other players. We find that cooperative subjects perceive actively chosen sanctions as a negative signal which significantly reduces the effect of sanctions.     

Why volunteer? Evidence on the role of altruism,image, and incentives

We examine motivations for prosocial behavior using new data on volunteer firefighters that contain a dictator game based measure of altruism, surveyed measures of other behavioral factors, and call records that provide an objective measure of time spent volunteering. Controlling for a variety of other explanations, we find that the decision to volunteer is positively correlated with altruism as well as with concern for social reputation or “image.” Moreover, by utilizing variation in the presence and level of small stipends paid to the firefighters, we find that the positive effect of monetary incentives declines with image concerns, supporting a prediction that extrinsic incentives can crowd out image motivation for prosocial behavior.     

Simple Reputation Systems*

We develop a model of simple “reputation systems” that monitor and publish information about the behavior of sellers in a search market with asymmetric information. The reputations created influence the equilibrium search patterns of buyers and thus provide for market‐based “punishment” of bad behavior. We show that a reputation system that rewards honesty can enhance welfare by allowing good sellers to truthfully signal their type. However, the same system can be prone to strategic manipulation by sellers who always have low‐quality products. In that case, we show that an alternative system which assigns reputations based on product quality rather than honesty can be superior.     

Firm ownership and internal labour practices in a transition economy

One feature common to many post‐socialist transition economies is a relatively compressed wage structure in the state‐owned sector. We conjecture that this compressed wage structure creates weak incentives for work effort and worker skill acquisition and thus presents adverse consequences for the entire transition economy if a substantial portion of the labour force works in the state sector. We explore firm wage incentives and worker training, as well as other labour practices and outcomes, in a transition setting with matched firm and worker data collected in one of the largest provinces of Vietnam – Ho Chi Minh City. The Vietnamese state sector exhibits a compressed wage distribution in relation to privately owned firms with foreign ownership. State wage practices stress tenure over worker productivity and their wage policies result in flatter wage–experience profiles and lower returns to education. The state work force is in greater need of formal training, a need that is in part met through direct government financing. In spite of the opportunities for government financed training and at least partly due to inefficient worker incentives, state firms, by certain measures, exhibit lower levels of labour productivity. The private sector comparison group to state firms for all of these findings is foreign owned firms. The internal labour practices of foreign firms are more consistent with a view of profit‐maximizing firms operating with no political constraints. This is not the case for Vietnamese de novo private firms that exhibit much more idiosyncratic behaviour and whose labour practices are often indistinguishable from state firms. The exact reasons for this remain a topic of on‐going research yet we conjecture that various private sector constraints, including limited access to formal capital, play an important role.     

Financial crises and liquidity shocks a bank-run perspective

In contrast with the financial multiplier literature, this note explores a case in which the shock triggering a financial crisis stems from the financial sector itself; it is not a shock stemming from the real sector which gets amplified by, say, agency problems. The basic intuition is provided by the bank-run literature of the Diamond and Dybvig (1983) variety. Financial development is modeled as a mechanism that endows real assets (e.g., land and capital) with liquidity. However, liquidity can be impaired by shocks that are equivalent to a bank run. Liquidity creation enhances real asset prices, while a liquidity crunch generates asset price collapse. This bubble-looking episode is not driven by standard fundamentals, although it is fully in line with rationality. In this context, devoid of other frictions like price stickiness, the note examines the effect of monetary policy in the absence of nominal rigidities. It shows that preventing price deflation is not enough to offset relative (to output) asset price meltdown, but lower policy interest rates increase relative asset prices and steady-state output. Moreover, in the neighborhood of a first-best capital allocation, an increase in the liquidity of capital may lower the welfare of the representative individual, even if the higher liquidity of capital is sustainable and, hence, not destroyed by future crash – illustrating the possibility of “excessive” financial innovation. An extension of the basic model supports the conjecture that low policy interest rates may have given further incentives to the development of “shadow banking.”     

Classification of natural language messages using a coordination game

The role of natural language communication in economic exchange has been the focus of substantial experimental analysis. Recently, scholars have taken the important step of investigating whether certain types of communication (e.g., promises) might affect decisions differently than other types of communication. This requires classifying natural language messages. Unfortunately, no broadly-accepted method is available for this purpose. We here describe a coordination game for classification of natural language messages. The game is similar in spirit to the “ESP” game that has proven successful for the classification of tens of millions of internet images. We compare our approach to self-classification as well as to classifications based on a standard content analysis. We argue that our classification game has advantages over those alternative approaches, and that these advantages might stem from the salient rewards earned by our game’s participants.