A Tale of Two Markets

The standard model of labor is one in which individuals trade their time and energy in return for monetary rewards. Building on Fiske’s relational theory (1992), we propose that there are two types of markets that determine relationships between effort and payment: monetary and social. We hypothesize that monetary markets are highly sensitive to the magnitude of compensation, whereas social markets are not. This perspective can shed light on the well-established observation that people sometimes expend more effort in exchange for no payment (a social market) than they expend when they receive low payment (a monetary market). Three experiments support these ideas. The experimental evidence also demonstrates that mixed markets (markets that include aspects of both social and monetary markets) more closely resemble monetary than social markets. People often need help accomplishing tasks such as moving their possessions to a new residence, painting a room, preparing tax returns, and even taking care of their offspring.When we ask for help, we may wonder whom to approach and how best to motivate him or her. Should we ask a professional or a friend? If we ask a friend, should we offer compensation? If so, how much should we offer, and what form of compensation would be most effective? Would cash or token rewards (e.g., personal gifts or chocolates) provide a stronger incentive? Finally, are there interactions between these factors such that different levels of incentives are more or less effective for different forms of compensation? Suppose, for example, that you are about to give birth (or pass a kidney stone) and want someone to be there to support and help you. You are faced with multiple options: You can ask friend A; you can hire a professional doula (a birthing coach); or you can ask friend B, who is also a professional doula. You want someone motivated to give you the best possible support despite the long hours and the expected pain and difficulty. You also know that you will get accurate information about this person’s ability and dedication only once you are in the hospital, well past the point when you can ask someone else to help. You are also considering ways to further motivate your potential helper. You can offer the helper nothing, you can offer different amounts of cash, or you can offer token rewards such as gifts. Which type of reward will be the most effective, and will this depend on whom you select to help you? Another example, highly relevant to experimental psychologists, concerns motivating participants in laboratory experiments. Psychologists typically either pay participants or offer them a course credit as a reward for showing up, rather than rewarding them directly for their effort. Participants in psychological experiments, however, have control over their own effort level and are unlikely to face any adverse consequences of low performance. Under these conditions, it is important to know how to motivate participants so they exert the maximum effort in their tasks. In this article, we focus on cases such as these—that is, situations in which payment is independent of effort—by examining the relationship between forms of compensation (cash vs. token), the levels of payment (no, low, and medium), and the resulting effort expended. We propose that the relationship between compensation and effort hinges on the distinction between two kinds of markets: monetary markets and social markets, which are characterized not only by the type of good or service exchanged but also by the form of compensation offered. Using monetary payments causes participants to invoke monetary-marketplace frames and norms. When money is not involved (i.e., when there is no monetary reward or there is a gift reward), the market is perceived to be a social market. Three experiments demonstrate that this distinction has material consequences for payment-effort trade-offs. The foundation for our proposal is Fiske’s relational theory (1992; see also Aggarwal, 2004). Fiske’s model posits four basic types of social relationships: communal sharing (CS), authority ranking (AR), equality matching (EM), and market pricing (MP). High levels of cooperation and ‘‘we-ness’’ earmark CS Address correspondence to Dan Ariely, MIT, 38 Memorial Dr., E56311, Cambridge, MA 02142; e-mail: [email protected]. PSYCHOLOGICAL SCIENCE Volume 15—Number 11 787 Copyright r 2004 American Psychological Society relationships. AR relationships are recognized by their clear superior-subordinate relationships. For example, in the work environment, there is no question as to who is the boss (the one giving orders) and who is the peon (the one doing menial tasks). EM relationships lie somewhere between CS and AR relationships—they are very structured but exhibit equality. In EM relationships, everybody receives the same rewards, and reciprocity is monitored to ensure that the scales never get too far out of balance. Finally, MP relationships generally involve ongoing cost-benefit analysis, and participants’ payments for their labor are based on a wage rate that reflects the amount and quality of the work performed. From the perspective of labor, we can divide Fiske’s four types of social relationships into two general categories: one based on economic exchanges and one based on social exchanges. The economic-exchange category (which we term money market) includes only MP relationships and represents the most common incarnation of labor markets. The social-exchange category (which we term social market) includes the other three relationship types (CS, AR, and EM) and represents most nonmonetary exchange relationships. Our central proposition is that the relationship between payment and effort will depend on the type of exchange (money vs. social markets). In money-market relationships, effort will be exerted according to reciprocity, and the amount of compensation directly influences individuals’ level of effort (Clark & Mills, 1993; Fehr & Falk, 2002; Rabin, 1993). Reciprocity means that performance will be lowest when there is no payment, higher in exchange for low payment, and still higher in exchange for medium payment. Conversely, in social-market relationships, effort is shaped by altruism, the amount of compensation is irrelevant, and individuals work as hard as they can regardless of payment (Batson, Sager, Garst, & Kang, 1997; Cialdini, 1997; Trivers, 1971). Altruism results in a level of performance that is high, constant, and insensitive to payment level. Thus, we have the following hypotheses for one-shot markets in which individuals are compensated up front for participation: Hypothesis 1: The relationship between compensation level and effort will be different in social versus money markets. Hypothesis 1a: In money-market relationships, effort will increase with payment level. Hypothesis 1b: In social-market relationships, effort will be at a high level and insensitive to payment level. Hypothesis 1 also predicts a distinction between exchanges in which payment is not mentioned (‘‘not paying at all’’) and those in which individuals are told explicitly that they will not be paid (‘‘paying nothing’’). Whereas not mentioning payment is likely to cause individuals to consider themselves to be in a social-market relationship, telling individuals explicitly that they are not getting paid is likely to cause them to consider themselves to be in a money-market relationship. Our framework predicts that not paying at all in the context of socialmarket relationships can create higher levels of incentives than low levels of compensation in the context of money-market relationships, a prediction that is shared by many other accounts (Bem, 1965; Deci, Koestner, & Ryan, 1999; Festinger, 1957; Gneezy & Rustichini, 2000b; Lepper, Greene, & Nisbett, 1973). Thus, we have an additional hypothesis: Hypothesis 1c: Effort in exchange for no payment can be higher than effort in exchange for low monetary payment. It is important to consider factors that influence whether exchanges are perceived as money or social markets. One important aspect of Fiske’s (1992) model is that relationships between two parties can take on different forms at different times. Consider, for example, a stereotypical nuclear family in which chores can be completed because everyone pitches in (CS), because mom tells family members what to do (AR), or because allowances depend on performance (MP). Similarly, the relationship between an employer and an employee can sometimes be characterized as a social-market relationship and at other times as a money-market relationship. The question arises, what shifts the relationship from one type of market to the other? Our second central prediction is that markets containing signals of both social-market relationships and money-market relationships will be perceived and treated much like money-market relationships (for a related study on the effect of monetary outcomes on the type of market, see Gneezy & Rustichini, 2000a): Hypothesis 2: Including both monetary payments and signals of social exchanges will cause individuals to perceive an exchange as a money-market exchange, and the pattern predicted by Hypothesis 1a will follow. According to these predictions, in social markets, when the payoffs are nonmonetary or when there is no payment at all, effort will be high and relatively insensitive to reward levels. In contrast, in money markets, effort will start at low levels and will increase with payment (reciprocity). Finally, mixed markets, which have both social and monetary components, will behave much like money markets. Figure 1 illustrates these predictions.