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Chapter 19: Problem 5

A firm is considering two policies to increase worker output. The first policy would involve an increased wage described as an incentive for workers to increase their effort. The second policy is to announce a voluntary bonus for those workers whose effort is deemed to be extraordinary. Using insights from behavioral economics, which policy do you believe will be the more effective?

Short Answer

Expert verified
According to insights from behavioral economics, the more effective policy is likely to be the second one: offering a voluntary bonus for extraordinary work. It capitalizes on behavioral insights like prospect theory and competition among workers.

Step by step solution

01

Analyze the first policy

The first policy being considered involves an increased wage as an incentive for workers. On the surface, this seems like a good plan. People generally work to earn money, and knowing that they could earn more might motivate them to work harder. However, it's worth noting that this approach might lose effectiveness over time. Assuming the increase is not massive, workers could eventually start viewing the raised salary as the new normal, causing the motivation to wane.
02

Analyze the second policy

The second policy involves providing a voluntary bonus to those workers who put in 'extraordinary' effort. This approach builds on several psychological factors. One is the prospect theory, which posits that people value a gain that is seen as a potential more highly than an actual gain. Secondly, the bonus creates an element of competition which can also act as motivation. Finally, the bonus, being 'extraordinary', is seen as a reward for effort beyond the standard, which can make the workers feel valued and appreciated.
03

Compare the policies

Comparatively, though both policies have possible positives, the second policy seems to have more potential to increase worker output. It capitalizes on behavioral insights like prospect theory and takes advantage of the competitive spirits. Of course, overall effectiveness could still depend on the particular situation and people involved.

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