Multi-Task Moral Hazard Trade-off
When employees are tasked with multidimensional production functions, output-based incentives cause effort diversion away from non-measurable outcomes toward incentivized metrics. In education, objective test score incentives increase test performance but harm students' socio-emotional development and love of learning.
Picture this
Imagine a fruit farmer paying workers solely by the weight of apples picked; workers will aggressively shake trees to gather heavy apples quickly, bruising the branches and ruining the orchard's future yields. Tying rewards exclusively to easily countable results forces workers to sacrifice long-term quality and unmeasured care just to max out their immediate score.
What the evidence says
Objective incentives reduced student love of learning (p = 0.08) and overall socio-emotional development relative to subjective incentives by 0.05 standard deviations (p < 0.10), while increasing student desire to leave the school by 0.086 standard deviations (p < 0.10).
- Who
- N = 15,418 students across 234 private schools in Pakistan (grades 4–13).
- How
- Randomized controlled trial (RCT) comparing flat-raise controls, subjective performance raises, and objective test-score-based raises over an 18-month review cycle.
What to do
Design compensation contracts that incorporate qualitative manager evaluations alongside quantitative benchmarks to preserve effort across non-measurable performance dimensions.
From the source
"Objective incentives negatively affect student socio-emotional development, including a significant decrease in love of learning and an increased likelihood students say they want to change schools. Subjective incentives result in a small positive effect on overall socio-emotional skills."
Subjective versus Objective Incentives and Employee Productivity