This paper presents an experimental examination of a variety of group incentive programs. We investigate simple revenue sharing and more sophisticated, target-based systems such as profit sharing or productivity gainsharing, as well as tournament-based and monitoring schemes. Our results can be characterized by three facts: (1) history matters; how a group performs in one incentive scheme depends on its history together under the scheme that preceded it; (2) relative performance schemes outperform target-based schemes; and (3) monitoring can elicit high effort from workers, but the probability of monitoring must be high and, therefore, costly.

In many of the decisions we make we rely on the advice of others who have preceded us. For example, before we buy a car, choose a dentist, choose a spouse, find a school for our children, sign on to a retirement plan, etc. we usually ask the advice of others who have experience with such decisions. The same is true when we make major financial decisions. Here people easily take advice from their fellow workers or relatives as to how to choose stock, balance a portfolio, or save for their child’s education. Although some advice we get is from experts, most of the time we make our decisions relying only on the rather uninformed word-of-mouth advice we get from our friends or neighbors. We call this ?aive advice? In this paper I will outline a set of experimental results that indicate that word-of-mouth advice is a very powerful force in shaping the decisions that people make and tends to push those decisions in the direction of the predictions of the rational theory.

This paper surveys a set of experiments conducted by Roy Radner and myself (1989) and Peter Linhart, Radner, and myself (1989a; b), all of which were conducted to investigate the properties of the sealed-bid mechanism, a mechanism used to structure bargaining under situations of incomplete information. What we find is both bad news and good news for the mechanism. The bad news is that the behavior of subjects seems quite sensitive to the parameters of the prior distribution of types used and the number of rounds over which the experiment is run. As such prior distributions become more skewed (in a sense to be defined below), and the number of rounds in the experiment are increased to 75, bidder behavior becomes less linear. Such movements have a regular pattern, however, and this phenomenon is remarkably consistent. The good news is that such behavioral shifts do not seem to interfere with the efficiency of the mechanism. This is of course important for the acceptance of the mechanism in the real world, since if efficiency were to change dramatically as we change the parameters of the environment, adoption would have to proceed on a case-by-case basis. The fact that our results imply robustness of efficiencies indicates that, at least on a practical level, the sealed-bid mechanism may be a viable way to structure bargaining in many large-scale economic organizations. I. The Sealed-Bid Mechanism