Thursday, July 21, 2005

Incentive Trade-Offs

The other day a brilliant idea occurred to me. I am sure many of you have had to deal with certain constraints such as time or money. This is what economics is all about; observing peoples' behavior subject to some constraint, and tweaking such constraints to observe behavioral changes.

So those who are students have at some point been constrained by a deadline either to turn in homework or a paper. This would be an example of a time constraint. Suppose a group of students have a paper due on a Monday. However, they can turn it in late on Tuesday, but they will have to pay a small fee, say $5. Would this incentive cause more students to turn their papers in on Monday, or is the extra 24 hours worth the $5? Ok, now forget about the incentive for right now.

Suppose the paper was due on Monday yet there was no $5 fee if you turn it in late, but also no guarantee you would get credit. I am sure most of the students would turn the paper in on Monday, yet a few students would try and turn it on Tuesday. These students might have some valid excuse or they may just be slackers, but either way, they would feel guilty about turning it in late. We will call this guilt a moral incentive and a moral cost.

Now suppose we announce the incentive program. If the $5 cost of turning the paper in late is less than the marginal benefit a student receives from having less stress, then the student will most likely turn in the paper on Tuesday. Otherwise, the student will turn it in on Monday.

But something else is going on here. That moral incentive (the guilt) is being traded with an economic incentive (the $5). So how high does the fee have to be to make every student turn the paper in on Monday and how low does it have to be where every student turns it in on Tuesday?

This all depends on each students utility function.

To be continued...

3 Comments:

Blogger Jim V said...

It also depends on the environment. In law school, I'd easily pay $50 or even $100 to get an extra day at times for a critical brief or take-home final. This magnified willingness to pay a fee may be due to the fact that law school grades are all based on a single test. There are few if any mid-terms, and never any quizzes or tests throughout the semester. For the most part, your grade for the class is whatever grade you get on the final exam.

Dumping all that pressure into one exam dramatically increases my willingness to pay to extend a deadline. Guilt? Nope. I had any thought of guilt driven out during first year. They work you so hard for the first two years that by the time third year comes around you've realized that the professors won't like you no matter what you do, so you're just in it to challenge yourself, not please a professor. Of course, I could feel guilt for failing to make the deadline on my own, but I'm going to be a lawyer soon. I've been trained to blame that failure on other people!

6:16 AM  
Blogger David Yaffe said...

Good point Jim. That "weight" you would place on a paper, take-home exam, or homework would be included as a function of your utility.

Now I just need to figure out how to model this and turn it into a paper!

11:08 AM  
Blogger Capital Freedom said...

You mention that in the absence of the $5 fee, there is no guarantee that the student will receive credit on the paper. The student would evaluate this risk based on his perception of the professor's likelihood of not giving him credit and/or his ability to persuade the professor to grant him an extension. This risk is the student's cost, depending on whether the student is a risk-taking, risk neutral, or risk-averse individual. The students who would turn it in a day late either had something else going on that was worth more to them at the time, they have high confidence in their ability to persuade the professor to give them credit, they believe the risk of not receiving credit is low enough to take that chance, or they are not risk-averse.

Thoughtful post!

5:10 PM  

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