Economists Do It With Models

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Dilbert On The Alignment Of Incentives…

December 28th, 2009 · 7 Comments

Dear Readers: I try to consistently make the point that understanding how incentives work is a super useful skill to have in daily life. For example, you might be thinking “hmm, why does my boss not seem as upset as I am by the size of my year-end bonus?” Okay, maybe that one is obvious- clearly the incentives of you and your boss are not aligned well in this case, since the fact that you can’t buy your shiny new Lexus doesn’t really have an impact on his personal well-being. In fact, the incentives of you and your boss may even be negatively aligned if your bonus comes out of his budget or something like that. So what is an employee to do?

One option would be to make an emotional appeal to the boss. I do not recommend this approach. People may try to convince you that the assumption that people act pretty much solely out of self-interest is not valid- after all, people aren’t as purely self-interested as traditional economists would have us believe, right? Well…while people do exhibit various forms of altruism and fairness-seeking behavior, it’s unclear whether or not the behavior is self-interest in sheep’s clothing. (I believe there are several sitcom plots on this topic if I am not mistaken.) For example, if volunteering makes you feel good about yourself, it is really selfless? If unfair situations give you philosophical migraines, is remedying them not specifically in your self-interest? And so on…

The reason that I point this out is to explain why appeals to fairness, etc. often fall on deaf ears- if the person you are trying to reason with cared about these things in the context of your disagreement, you would probably not be having the disagreement in the first place. In the above example, a better strategy would be to figure out how to align the incentives of your boss more closely with your personal payoff. The Dilbert employees seem to have figured this out:

Now, this certainly moves the alignment of incentives in the right direction- if the employees don’t get what they want, the boss doesn’t get something that he (presumably) wants either. Therefore, the boss can improve his personal well-being by giving the employees what they want. (Personally, I very much prefer relying on people to maximize their own happiness rather than relying on them to care about mine.)

But how powerful is this incentive? That depends on how much the boss would have liked the gift that came along with better bonuses- if the “good” gift was a lucite paperweight, witholding is not likely to have a large impact. On the other hand, if the “good gift” was a lucite (since it seems like the vast majority of corporate gifts are made of lucite) Lexus, the boss would probably now be paying a lot of attention. Therefore, a key component of this strategy is not only making an active point of giving nothing (as they did by presenting the empty box rather than just ignoring the gift-giving process altogether) but also making it clear what the alternative payout would have been. This is harder than it may initially seem, since anyone can say “oh, I WAS going to buy you a two carat diamond, but you upset me so here’s this lump of coal instead.” You have to make your statement credible. For example, your empty box probably carries more weight if you’ve shown yourselves to be very generous in the past.

(In a timely coincidence, my roommate said this morning that I was a combination of Pavlov, Hitler and Elle Woods. I take offense to exactly one of those comparisons, and it’s not the Pavlov one. =P )

Tags: Incentives

7 responses so far ↓

  • 1 the weakonomist // Dec 29, 2009 at 9:55 am

    If the lump was big enough, I’d be happy with the coal.

    I’ve never understood why Santa gives fossil fuels to bad children. Rocks would have less value.

    I like the sarcasm approach though, a la Dilbert. Or you could do like Christmas Vacation and kidnap your boss and then guilt-trip him until he gives you a better bonus and then pray he doesn’t press charges,

  • 2 econgirl // Dec 29, 2009 at 10:19 am

    Heh. It is kind of funny now that coal was chosen as the quintessential useless item way back when.

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