Abstract

This paper shows that the impact of workplace incentive schemes can depend on the complexity of the scheme, and also the cognitive ability of the worker population, because these matter for whether certain features of the scheme are shrouded attributes. Specifically, the findings indicate that complexity and bounded rationality can cause workers to overlook a dynamic aspect of workplace incentive contracts that would otherwise create perverse incentives to reduce effort, the so-called ratchet effect. The findings are based on a combination of large-scale, long-term field experiments within a warehouse, online experiments conducted with the same worker population, and online experiments conducted with workers on Amazon Mechanical Turk. The field experiments find only a weak ratchet effect. The online experiments build the case that for many workers, particularly those with lower cognitive ability, ratchet effects may be weak because in the relatively complex scheme, the dynamic aspect of incentives is a shrouded attribute. Making the scheme simpler causes the ratchet effect to emerge. The evidence suggests that there may be an optimal degree of complexity that allows firms to harness static incentives while avoiding perverse dynamic incentives. A systematic analysis of what types of changes to the contract make the ratchet effect stronger or weaker provides findings with implications for incentive design as well as shedding light on the nature of complexity in general.