Bruno S. Frey University of Warwick, UK

Zeppelin University, DE CREMA – Center for Research in Economics, Management and the Arts, CH

Jana Gallus

University of Zurich, CH

Monte Verità Conference on Signaling 14 – 19 October 2012

AWARDS ARE A SPECIAL KIND OF SIGNAL

Awards:

2

Orders

Order of the Elephant (Denmark)

Awards:

3

Crosses

“Bundesverdienstkreuz“ (Germany)

Awards:

4

Medals

Olympic Medals

Awards:

5

Prizes

Nobel Peace Prize

Awards:

6

Titles

Honorary doctorate for Clint Eastwood

Awards

7

“A ridiculous, outdated system that cannot be improved upon” (The Economist 2004)

8

Awards:

Signals emitted by • issuer (principal) • recipient (agent)

Difference to monetary rewards • conditions where superior, inferior? • possible combinations?

Our contribution

9

Signaling theory <-> awards

I) Signals emitted by principal II) Signals emitted by recipient III) Evaluation of effects identified;

when are awards superior? IV) Conclusions

Procedure

10

A) Types of Signals

1. Identity 2. Establishing a mutual bond 3. Signaling when the desired tasks are vague 4. Supporting intrinsic motivation

I) Signals emitted by Principal

11

B) Signaling failures

1. Too many awards 2. Awards going to undeserving agents 3. Awards being publicly refused 4. Unclear signals 5. Potentially negative effects on non-recipients

I) Signals emitted by Principal

12

1. Loyalty

2. Signal of ability to outside observers

3. Signal of appreciation toward giver

4. Signal of membership in group

II) Signals emitted by Award Recipient

13

Our analysis seeks to explain:

•Principals use awards to signal their identity (not purely materially-oriented types)

•Principals show their appreciation of agents’ behaviour:

– public revelation – special bond

III) Towards Testable Propositions

14

• The signal emitted is the stronger, the more rare the award.

• The signal emitted is the stronger, the more costly the award is perceived to be.

• Accepting an award signals loyalty and appreciation toward the giver. Costs arise when this relationship is violated.

III) Towards Testable Propositions

15

• Awards are superior signals when – tasks are vague and – cannot be contractually fixed ex ante

• Awards tend to raise (crowd-in) intrinsic motivation

• Awards are a more sustainable signal (less decreasing marginal utility than for money)

III) Towards Testable Propositions

16

• Monetary rewards are less risky when

– principal is unsure about the agent’s type and future behaviour

– awards are prone to misinterpretation

– a public rejection of an award is likely

III) Towards Testable Propositions

17

• Special type of signal

• Costs of awards mainly immaterial (time, effort)

• Signaling failures – undeserving recipients – unclear signals – possible negative effects on non-recipients

IV) Conclusions

18

Relative advantages of awards over monetary rewards • Signal type or identity of emitter (principal) • Establish mutual ties • Performance

– when tasks are imperfectly defined and measured – when intrinsic motivation risks being crowded-out

IV) Conclusions