July 08, 2008

Economics meets social psychology on incentive theory

In another June 2008 American Economic Review article, Ellingsen and Johannesson introduce a standard concept from social psychology into a standard economic model of incentives, and find that it helps explain some well-known empirical puzzles.

This is not at all the first article in the economics literature that explores the role of social motivations, and the authors provide a good discussion of prior work.

"In Pride and Prejudice: The Human Side of Incentive Theory", Ellingsen and Johannesson add two motivational premises to the standard principal-aget model: people value social esteem, and the value they experience depends symmetrically on who provides the esteem: they value esteem more from those who they themselves esteem.
Their main result is to show how an incentive that otherwise would have a positive effect on behavior can have a negative effect for some people because of what the incentive tells the agent about the principal. For example, they suggest this as an explanation for "the incentive intensity puzzle that stronger material incentives and closer control sometimes induce worse performance" (p. 990).


Posted by jmm at 09:06 AM | Comments (0) | Permalink »

ICD introductory readings from on high

Students often ask me what they can read to learn about ICD. I've not had a terribly good answer to that. On the one hand, the foundations -- especially mechanism design in economics, and game theory, and engineering design theory, and social psychology -- are ancient (well, a few decades old), and have very rich literatures. But I haven't seen (haven't really searched for) good intros. And, these are the building blocks of ICD, but the particular area in which we focus -- incentive-centered design for information systems -- and the particular multi-disciplinary approach we take -- is rather new. I don't know that folks have written any good overviews yet.

However, three quite nice articles just appeared in the American Economic Review that are a step in the right direction. They are focused on mechanism design and microeconomics (not social psychology, computation theory, nor specifically applications to information system design). But they are accessible, short, and written by giants in the field; in fact, they are revised versions of the Nobel lectures given the by three laureates recently cited for creating the foundations of mechanism design theory: Leonard Hurwicz, Eric Maskin and Roger Myerson.

Maskin's overview, "Mechanism Design: How to Implement Social Goals", doesn't require any math. He introduces implementation theory, "which, given a social goal, characterizes when we can design a mechanism whose predicted outcomes (i.e., the set of equilibrium outcomes) coincide with the desirable outcomes" (p. 567).

Myerson's article, "Perspectives on Mechanism Design in Economic Theory", begins to introduce some of the basic modeling elements from the theory, so it has a bit more math, but it's not heavy going for those who have had an intermediate microeconomics class. He introduces some of the classic applications from economics: bilateral trade with advsere selection (hidden information), and project management with moral hazard (hidden action).

Posted by jmm at 08:49 AM | Comments (1) | Permalink »