Today I have been working on a post regarding the auto industry bailout, and it made my head hurt so much that I figured I would give you something easier to digest in the meantime. My primary area of research is in incentives, both in the workplace and in education, and I plan to do a feature on the site regarding different incentive programs along with their intended and unintended consequences. Setting up an incentive scheme generally requires thinking a lot about the motivations and potential behavior of the person that you are trying to incent (and the other players in the game) rather than just focusing on the result that you are trying to get from him or her. To illustrate the need for this type of thinking, I present a particular type of auction. (This example was first given to me in Max Bazerman’s negotiations class at HBS.)
I am auctioning off a normal $20 bill. (Normal auction- live, open bid, etc.) The highest bidder in the auction pays his bid and gets the $20 bill. The unique part about this auction is that the second highest bidder also pays his bid, but gets nothing. How much would you bid for this $20 bill? Are there certain circumstances that are required for you to make this bid?
I will post an analysis tomorrow, so you can think about this over your St. Patrick’s Day green beer. Sláinte!