The Theory of Incentives I: The Principal-Agent Model

The goal-gradient hypothesis denotes the classic finding from behaviorism that animals expend more effort as they approach a reward. Building on this hypothesis, the authors generate new propositions for the human psychology of rewards. They test these propositions using a field experiment, secondary customer data, paper-and-pencil problems, and Tobit and logit models. The key finding indicate that (1) participants in a real cafe reward program purchase coffee more frequently the closer they are to earning a free coffee; (2) Internet users who rate songs in return for reward certificates visit the rating Web site more often, rate more songs per visit, and persist longer in the rating effort as they approach the reward goal; (3) the illusion of progress toward the goal induces purchase acceleration (e.g., customers who receive a 12-stamp coffee card with 2 preexisting "bonus" stamps complete the 10 required purchases faster than customers who receive a "regular" 10-stamp card) and (4) a stronger tendency to accelerate toward the goal predicts greater retention and faster reengagement in the program. The conceptualization and empirical findings are captured by a parsimonious goal distance model, in which effort investment is a function of the proportion of original distance remaining to the goal. In addition, using statistical and experimental controls, the authors rule out alternative explanations for the observed goal gradients. They discuss the theoretical significance of their findings and the managerial implications for incentive systems, promotions, and customer retention.

The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention

Digital advertising markets are growing and attracting increased scrutiny. This article explores four market inefficiencies that remain poorly understood: ad effect measurement, frictions between a...

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Inefficiencies in Digital Advertising Markets

This paper describes a new continuous-time principal-agent model, in which the output is a diffusion process with drift determined by the agentâ€™s unobserved effort. The risk-averse agent receives consumption continuously. An optimal contract, based on the agentâ€™s continuation value as a state variable, is computed by a new method using a differential equation. During employment the output path stochastically drives the agentâ€™s continuation value until it hits a low retirement point or a high retirement point. Unlike in related discrete-time models, one can use calculus to derive comparative statics and evaluate inefficiency

A Continuous-Time Version of the Principal-Agent

A superhydrophobic TPU/CNTs@SiO2 coating with excellent mechanical durability and chemical stability for sustainable anti-fouling and anti-corrosion

Design of mechanical robust superhydrophobic Cu coatings with excellent corrosion resistance and self-cleaning performance inspired by lotus leaf

A mosquito-eye-like superhydrophobic coating with super robustness against abrasion

Durable superhydrophobic coating derived from hard-soft technology with enhanced anticorrosion performance

New perspectives on structural parameters and hydrophobic model inspired by a superhydrophobic Cu cone-flower coating

The authors study multiperiod sales force incentive contracting in which salespeople can engage in effort gaming, a phenomenon that has extensive empirical support. Focusing on a repeated moral haz...

Fei Long

Papers

Design of mechanical robust superhydrophobic Cu coatings with excellent corrosion resistance and self-cleaning performance inspired by lotus leaf

A mosquito-eye-like superhydrophobic coating with super robustness against abrasion

Durable superhydrophobic coating derived from hard-soft technology with enhanced anticorrosion performance

New perspectives on structural parameters and hydrophobic model inspired by a superhydrophobic Cu cone-flower coating

Multiperiod Contracting and Salesperson Effort Profiles: The Optimality of “Hockey Stick,” “Giving Up,” and “Resting on Laurels”: