How Targeted Incentives Can Pay Off Over the Longer Term

June 1, 2007

Targeted incentives certainly affect human behavior. How much so is the focus of a new Working Paper titled "Effort as Investment: Analyzing the Response to Incentives," co-authored by John N. Friedman and Kennedy School Professor Steven Kelman.
Friedman and Kelman argue that targeted incentives often affect behavior before, during and after the targeted period. They cite the example of a basketball coach who offers to reward players who achieve high free-throw percentages during a certain stretch of the season. Due to learning and investment, the players often continue shooting higher percentages even after the targeted stretch is over. The authors seek to prove their theory with a simple model testing data from hospitals in the National Health Service (NHS) in England.
"Our results strongly support the hypothesis that incentives can induce capital improvements," the authors write. "Hospitals increase performance well in advance of the incentivized periods...and the performance improvements continue at a high level long after the incentives expire. The magnitude of these effects is economically large." In fact, the authors found a 40 percent reduction in emergency room waiting times over three years in response to a performance-based target and incentive program.
Kelman is Albert J. Weatherhead III and Richard W. Weatherhead Professor of Public Management at the Kennedy School of Government. Friedman is Teaching Fellow in Economics in the Department of Economics at Harvard University.
Access the Working Paper, "Effort as Investment: Analyzing the Response to Incentives," on the Kennedy School Working Papers website. The active URL for this paper is:

Steven Kelman image

Kennedy School Professor Steven Kelman co-authored the Working Paper "Effort as Investment: Analyzing the Response to Incentives."

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