The Effects of Incentives on Information Exchange and Decision Quality in Groups

ABSTRACT: This study uses an experiment to examine the effects of different compensation contracts (flat wage, group incentive, and noncompetitive individual incentive) on decision quality when information is distributed among different individuals. The results indicate that information exchange and decision quality are better under the group incentive than the individual incentive, even when both incentives provide an economic motivation for information exchange. Information exchange and decision quality are also better under the flat wage than the individual incentive, despite the stronger economic motivation for information exchange under the individual incentive. Analyses indicate that the effect of compensation contracts on decision quality is partially mediated through information exchange between group members. The results are consistent with higher group membership saliency under the group incentive and the flat wage than the individual incentive, and group membership saliency promoting information exchange between group members. The results also suggest that in a group decision-making context, differences in decision quality across compensation contracts may be better explained by psychological factors rather than economic factors.