From Barking Up The Wrong Tree:
What determines reciprocity in employment relations? We conducted a controlled field experiment and tested the extent to which cash and non-monetary gifts affect workers’ productivity. Our main finding is that the nature of the gift, not its monetary value, determines the prevalence of reciprocal reactions. A gift in-kind results in a signicant and substantial increase in workers’ productivity. An equivalent cash gift, on the other hand, is largely ineffective or even though an additional experiment showed that workers would strongly favor the gift’s cash equivalent.
It probably has nothing to do with reciprocity. If I pay you money you have to share it with your family and then buy a car out of your share. If I give you a car it is all yours.
This logic also often provides a psychology-free explanation of the endowment effect. You are willing to pay at most $10,000 for a car. But if I give you that car for free and offer to buy it back from you, you require $20,000, because you will get to keep only half of that money.
(inspired by discussions with my Behavioral Economics class.)
Update: See Ben’s comment below for another variation on the theme which also came up in class. If you have present-biased preferences you have an endowment effect because cash will be shared with future selves, whereas instantaneous consumption is all for your present self.
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April 23, 2010 at 1:36 pm
el chief
A touch cynical perhaps, though this reminds me of a story from work.
We wanted to give one of our developers a bonus for his good work, though he asked that it was in cash and not a bank deposit, so that his wife didn’t take it 🙂
April 23, 2010 at 2:06 pm
pll
This entry brought to my memory a 2005 article from the NYT, where in-kind incentives were described a lot more appealing than cash incentives:
“To generate more business in the pre-iPod era, Ms. Campbell said the building offered would-be tenants incentives like one or two months of free rent, depending on the size of the apartment. ”That didn’t get the attention that the free iPod did,” she said, even though she noted that monthly rents in the complex, which range from $755 to about $3,000, are much pricier than iPod Minis. “
April 23, 2010 at 2:07 pm
pll
Correct link to the NYT article.
April 23, 2010 at 2:08 pm
Ben
I think it’s a bit deeper than getting it all for yourself versus sharing with your family. When I was working, I had no family and any money I earned was all mine. That being said, when we got free breakfast, lunch, and dinner at work for 2 months, it improved my happiness at work by a lot more than an equivalent cash bonus would have.
The reason for me I think is something like subconscious hyperbolic discounting which controls my happiness, but normal discounting with my conscious choices about money. So when I receive $20 I consciously spread it over my lifetime consumption according to normal discounting (basically I don’t spend it), but when I receive a free $20 meal it all comes now. Since my happiness is dictated by some sort of hyperbolic discounting, I am happier with the second scenario.
April 23, 2010 at 2:31 pm
pll
+1 on the hyperbolic discounting over sharing as an explanation.
April 23, 2010 at 3:12 pm
jeff
yes in fact this is the same explanation. you are sharing with your future selves vs keeping it all for your present self.
April 24, 2010 at 1:25 am
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[…] Why Company Cars Instead of Cash? A gift in-kind results in a signicant and substantial increase in workers’ productivity. An equivalent cash gift, on the other hand, is largely ineffective […] […]
April 24, 2010 at 2:49 am
Yang
I am a student of Botond Koszegi!!!!
April 24, 2010 at 11:24 am
jeff
And I was a student of Matthew Rabin. So I am trying to figure out what relationship that puts you and me in.
April 27, 2010 at 12:00 am
Yang
What is Botond’s relationship with Matt Rabin?
April 24, 2010 at 1:38 pm
Daniel
The hyperbolic discounting story makes sense for fancy meals but the typical endowment effect story involves things like coffee mugs or houses, which are durable goods and will probably last much longer than cash. Then the time-inconsistency story would actually suggest the reverse of the endowment effect.
April 30, 2010 at 10:54 pm
bsbi-dz.com
in my opinion your article is very nice and very helpful