Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers David J. Cooper; John. Kagel; Wei Lo; Qing Liang Gu The American Economic Review, Vol. 89, No.(Sep., 1999), 781-804. Stable URL: hup:/links. jstor. org/sici? sici=0002-8282%28199909%2989%3A4%3C781%3AGAMIIS%3E2.0.C0%3B2-V The American Economic Review is currently published by American Economic Association. Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/ab gabout/terms.html. ISTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles,and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/journals/aca. html. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is an independent not-for-profit organization dedicated to creating and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact support @jstor.org. http://www.jstor.org/ Sat May2211:35:02004
Gaming Against Managers in Incentive Systems: Experimental Results with Chinese Students and chinese managers By DAVID J. COoPER, JOHN H. KAGEL, WEI LO, AND QING LIANG GU* We examine strategic interactions between firms and planners in China, comparing behavior between:(i)students and managers with field experience with this situa ion,(ii)standard versus increased monetary incentives, and (iii) sessions con ducted"in context, "making explicit reference to interactions between planners and managers, and those without any such references. The dynamics of play are similar across treatments with play only gradually, and incompletely, converging on a pooling equilibrium. A fivefold increase in incentives significantly increases initial levels of strategic play. Games played in context generated greater levels of strategic play for managers, with minimal impact on students. (JEL D23, D8, C92 Students of centrally planned economies ers, but cannot identify, a priori, which firms have long posited that these systems are prone are of which type. As a result, the central a"ratchet effect"(Joseph S. Berliner, 1976: planner sets initial targets for input usage and Martin L. Weitzman, 1980). Planners are output levels that are of broad applicability never as well informed about the production and uses the information gathered from the capacity of any individual firm as are the firm's performance to identify what is feasi- managers of the firm. The central planner ble in future planning periods. If firms re- knows that firms have different production spond naively to this initial incentive plan capacities, with some firms having higher high-productivity firms will outperform low- productivity (lower marginal costs)than oth- productivity firms. The central planner will then "reward"these high-productivity firms y reducing their input allocations and/or in- Cooper: Department of Economics, Case Westem Re- creasing their required output levels. Hov serve University, Cleveland, OH 44106; Kagel: Departme of Economics, Arps Hall, Ohio State University, 1945 Nort ever, firms should anticipate this ratcheting High Street, Columbus, OH 43210; Lo up of targets, cutting their ir production in an land China Studies, National Dong Hwa University, 1, Sec. attempt to mimic low-productivity types. This 2, Da-Hsueh Road, Hualien 97441, Taiwan; Gu: Glorious reduction of output with high-productivity University, 1882 West Yan-An Road, Shanghai 200051 firms imitating low-productivity types is China. This research was Chiang Ching-Kuo Foundation to Lo, the National Science Potentially, the ratchet effect can seriously re- uce production in centrally planned Foundation to Cooper. We have benefitted from disct Moreover, the ratchet effect is not just limited to with Patty Beeson, Robert Glaser, John Ham, Richmond planned economies. Similar strategic interactions Harbaugh,Thomas Rawski, Jean-Francois Richard, Alvin arise in any principal-agent interaction where the referees, and comments of seminar participants at Brandeis principal is uninformed about the agent's type and University,the joint Carnegie Mellon-University of Pitts- cannot (or will not) commit to a long-term con urgh applied microeconomy tract. Examples include eny rsity, Washington Universi Dennis A. Yao, 1988), job evaluation and incentive usiness, York University, and participants at the chemes(Barry W. Ickes and Larry Samuelson etings (Tucson), the Italian Experimental Economic 1987; James Dearden et al., 1990), piece-work wage meetings(Washington inter Econometric Society meeting(Chicago). We Cang Ping and the many other fine research The Chinese have a rather colorful term for this- from China textile univers “ whipping the fast
THE AMERICAN ECONOMIC REVIEW SEPTEMBER /999 rate schedules(Robert Gibbons, 1987), regulation of Several conclusions can be drawn from our natural monopolies(Michael A. Crew, 1994), and experimental data, At a general level, in all procurement contracting (Jean-Jacques Laffont and versions of the game, and with all subject pop- Jean Tirole, 1993) ulations, there is a strong initial tendency for In this paper, we report an experiment which high-productivity firms to ignore the strategic addresses several open questions about the de- implications of the ratchet effect. Only gradu velopment of the ratchet effect in centrally ally(and incompletely)does play converge to planned economies and, more generally, about pooling equilibrium. This replicates results the evolution of strategic play in games. We from other signaling game experiments Jord study a game that captures the essential features Brandts and Charles A. holt 1992; Zeinab Pa of the strategic interactions between planners tow and Andrew Schotter, 1993; Cooper et al and firms in a centrally planned economy. In all 1997a, b), indicating that this general pattern of equilibria of this game, a ratchet effect emerges play is unaffected by culture, subject popul ith high-productiy tion and incentiv productivity types, thereby resulting in a pool This general pattern of play also suggests ar answer to an important question about the We compare the dynamics of adjustment to ratchet effect: Why should the ratchet effect equilibrium between: (1)standard"versus sub- ever be observed in field settings? If high stantially increased monetary incentives, (ii)the productivity firms anticipate that planners will standard" experimental subject population ratchet up their production targets and therefore students) and an"expert"subject population imitate low-productivity types, central planners with extensive field experience with the ratchet should also anticipate firms' mimicry and select effect (managers and white-collar workers in incentive schemes that do not elicit this strate state enterprises in the Peoples Republic of (for example, precommiting to a long-term con- China), and (ii) experimental sessions con- tract). Our results show that incentive schemes ducted"in context"versus a"generic"setting. that eventually produce the ratchet effect may The latter is no doubt the most novel of our actually work quite well initially for the central experimental treatment conditions, and there- planners, with inefficiencies arising only grad fore warrants further explanation ually over time as high-productivity firms learn For sessions played in context, the language to imitate low-productivity types. It has been is deliberately designed to relate to subjects suggested that, One possibility [why a planne field experi vith similar games For exam- might not precommit to a long-term contract], ple, we refer to subjects as"planners"and of course, is that the central planner is not aware managers"with"planners deciding what kind of the benefits of commitment"(Xavier Freixas of production target to assign to managers- et al., 1985). Our results suggest a different easy or tough. To the extent that the laboratory explanation: the planner may not precommit game and its equilibria are similar to experi- because initially there are minimal benefits to ences outside the laboratory, the use of context commitment may make subjects more sensitive to the strate ing at the detailed pattern of play, sev- gic implications of the game, facilitating con- eral interesting observations emerge. First, in vergence to the pooling equilibrium. In contrast, creasing payoffs for People's Republic of China in generic sessions, the language is kept delib-(PRC)students induced substantially higher erately abstract with firm managers referred to pooling rates by high-productivity firms in early as"A"players and planners referred to as"B" plays of the game(students in standard-pay players, with B players deciding between sessions only caught up after 20 or more repe- and"Y"( tough or easy contracts)in response to titions of the game). That is, more money in- A players"choices. The generic language is duced heightened initial levels of strategic play intended to minimize any relation to subjects suggesting that money can serve as a partial field experiences and may be expected to reduce substitute for experience. This provides some of consistent with the intuition of most theorists
VOL 89 NO 4 COOPER ET AL: GAMING AGAINST MANAGERS IN INCENTIVE SYSTEMS and a result of fundamental importance for the underpinnings of our treatments in Section m study of learning in games This section also outlines the procedures used Second, context facilitated the development running the experiments, Section Ill presents of strategic play among PRC managers, but had our experimental results. Section IV summa- minimal effect on PRC students. PRC managers rizes our results and offers concluding remarks were affected both in their roles as planners and as firms, with the impact on their role as plan- L. The Ratchet Effect Game ore pronounced than as firms. This result strong(albeit, indirect) evide Payoff tables were generated to capture the PRC firms have been subject to a ratcheting up essential strategic interactions of the ratchet ef- of production targets in response to superior fect game in the simplest possible setting. Gen erformance. The fact that context had a much erating the ratchet effect requires two separate stronger effect on PRC managers than on stu- insights from players. First, central planners dents suggests that context must be eliciting (CPs)must realize that they can use the infor something from managers'experiences as man- mation revealed by firms'(Fs,) choices in re- agers. It is difficult to see what this experience setting targets. Second, Fs must realize that CPs could be other than experience with the ratchet will use any information they reveal and that effect they should use a pooling strategy to avoid Finally, contrary to our expectations, PRc revealing harmful information. Our game there- students in their role as firms exhibited signifi- fore concentrates on Fs'output decisions and cantly higher initial levels of strategic play than the CPs responses. The Appendix to our work older, more experienced PRC managers Subse- ing paper( Cooper et al., 1998) gives full details quent manipulations indicate that this surprising on the underlying model of the ratchet effect, its result was due to the age and/or lower educa- relationship to Chinese institutions, its relation tional levels of older managers. This serves as a ship to the laboratory game, and how the payoff warning to experimenters as they expand their tables were generated from the model studies to an ever larger array of subject popu- The payoff tables are based on a simplified lations: although experimenters are used to as- version of the model in Freixas et al. There are suming that subjects can make elementary two types of Fs, high productivity(FH) and low calculations, follow simple chains of productivity(FL). The game begins with the facility with such"test-taking"skills may not firm learning its type. The firm then chooses its extend to older less-educated subject first-period output, while facing a preexisting target. After observing first-period output(but The plani oe the phper is and frlvonwg se rtichet tht teeoidm e tode, the alane er s w at the t effect. Drawing heavily on the cognitive psy- choosing its second-period output. The firm at- hology literature, we present the theoretical tempts to maximize the discounted sum of its profits. The planner's objective function is the 2 Not withstanding theorists'concern with the ratchet penalty proportional to the firms profits.5a total surplus generated by the firm minus In our laboratory game, the firm,'s second ersy(see the exchange between David Granick[1980, period output decision is taken as given-this is 1983] and Michael Keren [1982]) a straight maximization problem with no inter esting strategic elements. The remaining related problem unless subjects have been is a standard signaling game with the firm acting explicitly told to consider the similarities between the tw as the sender (the first-period output problems, andor the problems are quite similar(Mary L. Gick and Keith J. Holyoak, 1980; David N. Perkins an 4 In freixas et al. the begins with the period 1 Gabriel Salomon, 1988; Salomon and Perkins, 1989). Given target being set by the CP. We eliminate this step to simplify that the problem PRC managers face in the ratchet effect e game while concentrating on the ratchet effect. game must be quite similar to their experiences in the field. ratchet effect literature
THE AMERICAN ECONOMIC REVIEW SEPTEMBER 999 TABLE 1-FIRM PAYOFF AND PLAYER PAYOFF High-productivity firm EASY TOUGH 23456 ..2332 Planner payoff low-productivity firm high-productivity firm TOUGH 528 (the second-period target is its action). The when facing an FL type and greater for timing of the laboratory game is as follows choosing TOUGH than EASY when facing an FH type. I. Prior to the start of the game Fs learn their 4. Fs learn CPs choices and CPs learn Fs type productivity level, FH or FL (it was common Payoffs are then determined. 7 knowledge that the prior probability of each The game has three possible pure strategy 2. Fs choose among several different output sequential equilibria which are pooling at out levels. An F's payoff is a function of F's put levels 1, 2, or 3. All of these equilibria have type, the output level chosen, and the CP's a ratchet effect, with FHs imitating FLs in ef- actions(see Table 1). For any given output forts to receive an easy target. To see why these level, payoffs are higher if the CP responds are equilibria, consider the pooling equilibrium with an EASY rather than a toUGH pro- at output level 2. Since both types of F choose duction target. If an F did not anticipate that the same output level, the CP must believe each his choices affected the CPs response, he type is equally likely following play of 2. Given would choose 2 as an FL and 5 as an FH; we these beliefs, the Cp maximizes her expected refer to these as Fs' full information output payoff by choosing EASY (expected value of levels 704.5 versus 674 for TOUGH given the 50-50 3. CPs see the output level of the F with whom prior distribution of F's type). For all other they have been paired, but not F's type. CPs output levels, there are no constraints on the choose between a TOUGHor EASY produc- CP's possible beliefs. The out-of-equilibrium tion target. The CPs payoffs are a function beliefs that support pooling at 2 are that any of F's type and the target chosen Payoffs are other output level must come from an FH type so that the CP assigns a TOUGH contract Given that the CP assigns EASY following 2 nanish Chaudhuri (1996) and ToUGH following all other output level o-pcriod ratchet effect ga ns had 10-12 plays of the gar 7As noted above, we eliminate F's end-period response ady-state results response. even in a onc-period signalling game. adjusting the payoffs accordingly
VOL 89 NO 4 CO0PER ET AL: GAMING AGAINST MANAGERS IN INCENTIVE SYSTEMS neither type of F can gain by deviating from 2 IL. Experimental Treatments, Research The pure strategy pooling equilibria at outp Hypotheses, and Procedures levels I and 3 are supported by similar strate gies and beliefs The motivation for our experimental treat- The set of equilibria can be narrowed down ments, as well as the predicted impact of these by using the equilibrium refinements which treatments, can be best summarized within the have been proposed for signalling games. Un- framework of a belief-based learning model fortunately, most of the standard refinements do such as the modified fictitious play model of not yield a unique outcome. For example, the Cooper et al. (1997a, b). Play in this model intuitive criterion (In-Koo Cho and David M. consists of two distinct stages. Prior to any Kreps, 1987) leaves both pooling at I and 2. actual play, agents must form initial beliefs Only perfect sequential equilibrium(Sanford J. about the likely actions of their opponents. As Grossman and Motty Perry, 1986), an ex- play takes place, players modify their initial tremely strong refinement, is able to make a beliefs in response to the observed play of ot unique prediction, pooling at 2 ers and choose actions to maximize their pay ere is considerable experimental research offs subject to their updated beliefs, We propose indicating that none of the standard equilibrium that incentives, expertise, and context can affect refinements adequately organizes data from sig- agents initial beliefs and/or the evolution of nalling games(see Brandts and Holt, 1992; Par- these beliefs over time in the following ways tow and Schotter, 1993; Cooper et al., 1997a) As an alternative, we ran simulations using the A. Incentives simple adaptive learning model developed in Cooper et al. (1997b). This is essentially a mul Subjects who put themselves into the other tiplayer version of fictitious play with initial players'shoes in forming initial beliefs have a beliefs fitted from the data. Cooper et al. substantial advantage over players who simply (997a, b) demonstrate that this model does a assume a distribution(such as a uniform distri good job of characterizing play in signaling bution over all strategies). However, such de- game experiments similar to the ratchet effect ductive reasoning involves some effort on game. For our game, simulations of the adaptive players part which, ceteris paribus, they prefer learning model overwhelmingly converge to the to avoid. Thus, the amount of effort players pooling equilibrium at 2.(This result holds expend on reasoning about the game before whether initial beliefs are fitted from the data or forming initial beliefs should be sensitive to the flat priors are imposed. ) Convergence to this payoffs resulting from their actions. Since in pooling equilibrium follows a typical pattern of creased deductive reasoning should lead to play: simulated players early beliefs fail to more strategic play, increasing the payoffs adequately account for the relationship between should, if anything, increase the initial levels of Fs'choices and CPs' responses, so that Fs' strategic play. initial choices are clustered around their full While there are strong theoretical reasons to information output levels(2 for FLs and 5 for expect increased incentives to yield more stra- FHs). These initial choices induce CPs to give tegic play, past experiments reveal that incen yes do not typically play as strong a role contract for higher output levels. As FHs learn behavior as anticipated. There are numerous that the likelihood of an easy contract is much reports of experimental phenomena that are higher at 2 than at higher output levels, play essentially unaffected by incentives(see the converges on a pooling equilibrium at 2. many examples cited in Colin Camerer, 1995) Further, when incentives have impacted on behavior, they typically reduce the variance of This has no pure strategy separating equilibria. There do exist mixed strategy equilibria; these equilibr nalogous to the standard require all FHs to act strategically, choosing lower output analysis of the allocation of time between work and leisure than their full information output Gary S. Becker, 1965)
THE AMERICAN ECONOMIC REVIEW SEPTEMBER 999 outcomes around the mean, with little or no 1981). Novices tended to classify problems on impact on mean performance(see Vernon L. the basis of superficial details(problems with Smith and James M. Walker [1993b] for a re- balls or problems with springs) while experts view of the literature). In cases where mean concentrated on the physical principles in- erformance is altered, the observed changes volved(Newton's Second Law or conservation can usually be attributed to risk aversion(for of momentum) example, Yoram Kroll et aL., 1988; Steven J xpertise is narrowly defined and Kachelmeier and Mohamed Shehata, 1992; only likely to be transferred when situations are Smith and Walker, 1993a) perceived to be quite similar(Gick and Holy- Thus, we did not originally expect to find an oak, 1980; Perkins and Solomon, 1988; So- incentive effect which could not be explained lomon and Perkins, 1989). For example, several by reduced variance in outcomes or increased studies have examined the ability of students tion Il, subsection B, such an effect did logical problems(Roy D. Pea and D. M.Kur emerge. We discuss why the ratchet effect game land, 1984; Kurland et al., 1986; Perkins et al is particularly likely to be responsive to incen- 1988). Even though these problems drew up tives following documentation of these effects. skills used in computer programming, such planning ahead or breaking up problems into B. Expertise and Context manageable pieces, little transfer was found, except when generalizability was stressed in the There are strong reasons to presume an inter- training (David Klahr and Sharon M. Carver, action effect between expertise(as reflected in 1988) managers past experience with the ratchet ef- Context plays an important role in fostering fect) and the context treatment. Psychologists transfer because of its impact on perceptions of have done extensive work analyzing differences similarity. Information and knowledge are in performance and cognitive processes be- learned within a specific context. Even when tween experts and novices(see Robert glaser context is not directly relevant to what is being [1990] and Colleen Zeitz and Glaser [1994] for learned, it can serve as a trigger for recall. In summaries of the many differences between one dramatic example, Duncan R Godden and experts and novices identified to date). Experts Alan D. Baddeley (1975) had divers learn lists ypically employ more sophisticated approaches of words either on dry land or under 20 feet of in solving problems and see larger patterns in ocean water. One day later, subjects were ran data than novices. For example, in classic ex- domly assigned to one of these two environ periments involving chess pieces arranged as ments and asked to recall the lists of words they might be in the course of an actual game, Subjects in the same environment where they experts recalled the position of many more had learned the list were able to recall 59 per pieces than novices (William G. Chase and cent of the words, while subjects in a different Herbert A. Simon, 1973; Adrianus D. DeGroot, environment only recalled 46 percent of the list 1978). This greater recall was not based on Turning to our experiment, we expect that greater memory capacity but rather on the abil- managers, based on their past experiences ity to organize groups of pieces into subpatterns would be expert in recognizing and dealing with which could then be recalled as a chunk(e. g,a the ratchet effect. However, this expertise can castled king, a chain of pawns). As a result only have an effect if managers recognize the when pieces were arranged on the board in similarity between our laboratory ga random positions, experts were no longer able their field experiences. Context can be expected to recall the positions with any greater accuracy to play an important role in triggering this con- than the novices. Experts also tend to approach nection, resulting in heightened levels of strate- problems in terms of basic principles, rather gic play to begin with and/or more rapid than focusing on surface details as novices tend adjustments towards equilibrium compared to to do. One classic example involves the ap- managers playing the generic version of the proach to simple physics problems(D P. Simon same game and Simon, 1978: Michelene t. Chi et al However. the existence of a context effect
VOL 89 NO 4 COOPER ET AL.: GAMING AGAINST MANAGERS IN INCENTTVE SYSTEMS requires two necessary conditions: (I)the exis- game. Although we made some effort to control tence of a ratchet effect in field settings, and (2) for these problems, the education effect clearly the ability of subjects to transfer knowledge makes it difficult to compare the absolute from field settings to a laboratory experiment. levels of strategic play between students and Neither of these points can be taken for granted. managers As noted previously, there exists no general consensus that CPs actually ratcheted up quotas C. Summary of Research Hypotheses (see footnote 1), and psychologists have found that transfer tends to be narrow in scope. As such, it cannot be assumed ex ante that a context To summarize, ex ante we had three general effect will exist for our manager subjects. Con- hypotheses to test: (1)Increased incentives lead sequently, if such an effect exists, it suggests to increased strategic play. Based on past ex- that the strategic situation in the field must be perimental outcomes, we anticipated at best a quite close to the model implemented in the lab. weak effect. (2)Context promotes heightened Unlike managers, students do not have levels of strategic play among managers com- levant field experience to become expert in pared to generic sessions. Necessary conditions the ratchet effect game. However, to the extent for this effect are the existence of the ratchet that central planning and the ratchet effect per- effect in field settings and similarity, actual and meate Chinese culture, there may exist a context perceived, between managers' field experiences effect within the student subject population. and our laboratory game. By the same token But we expect that any observed context effect context should have a much less pronounced (or will be larger for managers than for students nonexistent) effect for PRC students. (3) Field because of their greater experience in dealing experience with the ratchet effect results in with the problem heightened levels of strategic play for managers Along similar lines, our prior beliefs were compared to students, particularly in context that managers would exhibit at least as much(if sessions. Ex post, we discovered an education not more) strategic behavior than students, par- effect among older managers which weakens ticularly if we confined our attention to context our last prediction. Our experimental design sessions. What we did not anticipate was that tests these three predictions and attempts to recent experience as a student provides a sig- control for the education effect nificant advantage in our experiment for reasons Differing payoff levels were used to deter- not directly related to understanding the strate- mine the effect of incentives on strategic play. gic problem. The experiment involved figuring All sessions were conducted with payoffs in out a relatively complex payoff table and a fair an experimental currency called"francs. In amount of record keeping. Students are used to standard-pay PRC student sessions, francs were dealing with arcane computational tasks de- converted into yuan so that, for the pooling signed by professors and did not seem bothered equilibrium at 2, the expected value of subject y these details. In contrast, many of the older earnings was 30 yuan(approximately $3.75 at managers were having so much trouble with the the official exchange rate). These earnings were even thinking about the actual game. On a more a good flow of recruits in Shanghai(whinh mure paperwork that it is hard to imagine they were thought to be the minimum necessary to ins mundane level, bifocals are rare in China. This high-wage area in China) and to be reasonably meant that many of our older managers had to consistent, in terms of purchasing power and use glasses to read the blackboard but removed outside income, to earnings in typical U.S.stu- their glasses to complete their record sheets. dent experiments. For high-pay PRC student They were so busy taking their glasses on and sessions, payoffs were scaled up by a factor of off that they scarcely had time to think about the five, giving an average payoff of 150 yuan for he poc dent in the prc this was a sizable amount of COntext may also improve performance as it can ai money. As points of comparison, the monthly omprehension by illustrating the meaning of otherwise wage was about 550 yuan for an instructor and 1, 200 yuan for an associate professor at China
THE AMERICAN ECONOMIC REVIEW SEPTEMBER 1999 Textile University during the time period our tegic play than the other subject groups and experiments were run, and the vast majority of never caught up. To compensate for this educa our manager sample earned less than 2, 000 tion effect, we simplified the procedures in two yuan per month ways. First, for each output level which was To test for the effects of expertise, we used actually selected by an F, the experimenter an- three subject populations: college students, nounced the Fs payoffs conditional on the CPs older managers, and younger managers. The responses and the payoffs of both CPs and Fs college students were from China Textile Uni- for these choices, so that subjects no longer had versity, which is considered a high-quality uni- to compute their own payoffs. Second, forms versity in China. (Less than 0.7 percent of for recording past play were eliminated, with Chinas population attend any university, and the entire history posted in several places (in China Textile University is considered a top 20 extremely large print), making it easier for sub university )Few of these students would have to see and think about the outcomes had any direct experience with the ratchet In addition, we recruited younger managers effect who were all university educated and under age Whenever possible all workers in China, in- 30. This group included graduate students at cluding foremen, are subject to product China Textile University who had spent at least plans. Therefore, all of the managers in our five years in factories before returning to the experiment should have had extensive field ex- university to obt a graduate (M. B A-type) perience with the strategic situation our ratchet degree and China Textile University alumni effect game was designed to capture. Older working in the area, with at least two years of manager sessions employed relatively high- experience. Thus, all of these subjects should ranking managers(some of whom partic- have had some experience as managers con- ipating in a two-year, part-time M. B A-style fronting the ratchet effect. Because all of these program at China Textile University), mid-level managers were relatively recent college gradu toies operating in Shanghai. About 25 percent the education effec bect them to be subject to managers, and senior foremen from textile fac- ates, we would not ex of the older managers had university degrees; To capture the interaction between expertise another 48 percent had some post-high-school and context, we ran approximately half of the education, typically a two- or three-year degree sessions as generic sessions and half as context imilar to community college or trade school in sessions. Generic sessions employed the same the United States. Among those who had post- payoffs as the context sessions. The only differ high-school training, most had not been stu- ence was in the instructions. The instructions dents any time recently as 40 percent were over for generic sessions used abstract language the age of 50 and another 40 percent were designed to minimize the similarity between the between 40-50 years old. Moreover, age is experiment and field settings. In context inversely correlated with quality of formal ed- ucation in China (even for the college ed cated). These factors probably all contributed to Under our original procedures, Fs' payoff table in- a substantial education effect. I cluded two additional output choices attached to either the riginal procedures, older PRC beginning or end of Table 1. These choices were designed managers started out with substantially less str shift the precise location of the equilibrium between ssions(to offset possible information leakage across rep- inated by one or more of the outputs in Table 1. so heoa ot alter the The conversion rate was 0.0026 yuan= 1 franc after choices were climinated in the modified trcatments subtracting 18,000 francs from total earnings. This total iversity degree holders in China can become fore- included subjects' show-up fee. All sessions were con- men after six months of training. After one or two years. 12 All of the PRC manager sessions employed the san be in charge of a department in the firm. Average earn- n rate as the high-pay student sessions. Given the ings for the young managers abstantially higher than es of the managers(as compared to students), for the older managers, as many worked in joint venture these sessions might best be viewed as standard-pay ses- enterprises involving some private capital and some state enterprise or government capital
VOL. 89 NO. 4 OOPER ET AL: GAMING AGAINST MANAGERS IN INCENTIVE SYSTEMS sessions, the instructions deliberately used lan TABLE 2--EXPERIMENTAL TREATMENTS guage emphasizing similarities between the ex- periment and field settings. For example, the terms"easy contract""tough contract" in Game structure PRC stud context sessions were replaced with X and Y in (3) Older managers generIc sessions,"“ output” was replaced with choice,”"high- productivity firms” were re placed with“Ar” players,,etc Modified Table 2 summarizes our experimental treatments (1 D. Procedures Generic Standard pay ( 3) Older managers High pay(2) Each experimental session employed be- edures (2 een 12 and 16 subjects. Subjects were ran domly divided into two groups, Fs and CPs. A total of 36 games were played in each session, with subjects switching roles after every 6 Within each 6 plays of the game a give Numbers in parentheses indicate number of experimen- CP was matched with a given F once, and only once, with different random matchings within each 6 plays of the game Subject identification which was given to the CP with whom they numbers were always suppressed so that sub- were paired for that period jects never knew the identify of the person with CPs recorded Fs' outputs and chose between paire tough"”and“easy” production plans. These Each subject was given a copy of the instruc- choices were entered on the communication tions including the payoff tables for both CPs sheet, which was then passed back to the other and Fs. The instructions were also read out loud side of the room. Fs'type was publicly an- to all subjects. Any substantive questions were nounced and subjects re repeated and answered to the entire group to that play of the game. Corded their payoffs for ensure common knowledge. Before playing Outcomes folowing each play of the game subjects were required to fill out a short ques- were posted, in a matrix format, for all pairings on tionnaire to insure they understood the payoffs a blackboard along with Fs,type. Thus, subjects associated with different actions (instructions knew the overall choice frequencies for both Fs The experiments were conducted manually with keep their own records of past play on forms barriers separating CPs and Fs so that they provided(which virtually all subjects did) could not see each other We conducted several "standard-pay"ses- Prior to each play of the game one of sions in the United States, both to shake down experimenters, standing on the Fs' side of the our procedures and as a potential control con- room,fipped a coin to decide Fs productivity dition(for cultural effects) in case we observed level for that game. The outcome of the coin flip a strong context effect among PRC students was shown to all Fs who then chose an output We did not observe the latter and found no level. Fs recorded their outputs on their subject significant differences between standard-pay record sheets and on a"communication"sheet, pRC sessions and the U.S. sessions. An earlier version of this paper reporting the results of these U.S. sessions is available upon request 5 The order of lative to the context games, inverted in at for ive to choose higher rather than lower numbers. This was done to further disguise the relationship between the labo- prevent cheating) and the commu ratory game and field experience that no additional information was sent)
