Working Paper

Payment Scheme Changes and Effort Provision: The Effect of Digit Ratio

Economic experiments report that individuals perform better under a piece rate payment scheme in comparison to a fixed payment scheme. The reason is straightforward: incentives motivate people, and without incentives they decrease their effort. Yet women are prone to choose a fixed payment over a piece rate payment scheme. We aim to find out if this gender effect is related to prenatal exposure to testosterone, which by nature is sexually dimorphic and has permanent effects on human brain development with an impact on cognitive and physical skills, as well as behavior. We investigate the effect of prenatal testosterone exposure on performance adjustment in a real effort task. Each subject is salaried under either a fixed rate or piece rate payment scheme for five periods and subsequently encounters the alternative payment method for another five periods. To observe the prenatal testosterone levels that the participants were exposed to during pregnancy, we use the so-called digit ratio as an indirect measurement method. It uses the length-ratio between the participants’ index and ring fingers to infer about their in utero testosterone exposure. Our results confirm the previous findings indicating that individuals perform better when incentivized by a piece rate payment scheme. Subjects who are paid piece rate in the first half of the experiment immediately decrease their performance at the beginning of the second half when paid under a fixed payment scheme. In contrast, subjects increase their effort if the payment method is switched from fixed rate to piece rate in the second half of the experiment. Subjects who were exposed to higher levels of prenatal testosterone provide significantly lower effort when the payment scheme is switched from piece rate to fixed rate.

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C91, D87, J33