Incentivizing Creativity: Cognitive Depletion and Multi-Dimension Incentive Contracts Open Access

Deason, Stephen (2017)

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In a recent influential study, Kachelmeier and Williamson (2010; KW) extend a series of experimental accounting papers investigating whether sorting contracts effectively sort employees into high- and low-creative types. KW provide evidence that the sorting value of contracts rewarding creativity is limited to the initial (i.e. short-run) production of creative ideas. This result seems to imply that firms interested in hiring high-creativity individuals would be better off - in terms of maximizing creative output - if they compensated employees using a one-dimensional contract rewarding quantity alone. Yet, the underlying premise of the balanced scorecard seems to be that multi-dimensional contracts improve realized outcomes. This study experimentally examines whether KW's findings are influenced by the depletion of an internal cognitive resource that may not impact these contracts in practice. Experimental results are opposite the findings of KW. I also find that operationalized cognitive resource replenishment using glucose appears to move worker productivity opposite the predicted direction. Further analyses demonstrate the importance of considering the underlying psychological and physiological mechanisms in research evaluating the effectiveness of multi-dimensional incentive contracts.

Table of Contents

I. Introduction 1

II. Background, Theory and Hypothesis 3 III. Method 10 IV. Results 13 a. Contract Selection Benefits 14 b. Hypothesis Tests 16 V. Conclusions 20 VI. References 24 VII. Figures 26 a. Figure 1 26 b. Figure 2 27 c. Figure 3 28 d. Figure 4 29 e. Figure 5 30 VIII. Tables - Descriptions 31 a. Table 1 32 b. Table 2 35

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