Incentives and group identity

It is shown experimentally that in all interactions control mechanisms can have hidden costs for reasons specific to group membership, and this finding contributes to the micro-foundation of psychological effects of incentives.

Abstract

This paper investigates in a principal-agent environment whether and how group membership influences the effectiveness of incentives and when incentives can have "hidden costs", i.e., a detrimental effect. We show experimentally that in all interactions control mechanisms can have hidden costs for reasons specific to group membership. In within-group interactions control has detrimental effects because the agent does not expect to be controlled and reacts negatively when being controlled. In between-group interactions, agents perceive control more hostile once we condition on their beliefs about principals' behavior. Our finding contributes to the micro-foundation of psychological effects of incentives. © 2014 Elsevier Inc.