Recent Question/Assignment

MPE 781/981- Economics for Managers
Trimester 1, 2015
Assignment: Economics Case Study
Due on the 4th of May ( Monday, 11:59 pm), 2015.
I. Assignment Overview: This assignment is based on an article published
in The Economists’ Voice titled ‘The Power of Awards’, by Bruno S.
Frey ad Jana Gallus, in 2014. The article is already attached to this assignment
question. Please read the article carefully before attempting this
exercise. You will also need to draw on other resources available through the
library as well as external resources. Please note that you need to provide
clear references for your sources when citing research and data.
II. Learning Objectives: This assignment is designed to encourage
you to think about the application of concepts learned in this unit in a
real world scenario. This assignment, indeed, is interesting as it explains
how the existing economic theories can explain the implication of the power
awards, in particular, how awards provide incentives to individual members
of an organisation or promote certain norms in the society/organisation. We
hope that this assignment will expand the horizon of your thoughts.
III. Assessment: Your score on this assignment contributes towards
40% of your final score for this unit. Based on the attached Rubric, your
assignment will be graded on your use of appropriate economic theory and
concepts, clarity of exposition and overall quality of your answers. Although
you can work in group, this is not a group assignment and you must
submit answers individually.
IV. Submission: This assignment must be submitted electronically on
CloudDeakin (CD) Dropbox area by all students by 11:59pm on the due
date. No hard copy is required. Print your name and student ID clearly
on the first page of your answers. Please check the Academic Honesty and
Misconduct section in the Unit Guide. Submitting your answers automatically
implies that you have read and accepted the Plagiarism and Collusion
Declaration, and that the submitted answers are entirely your own work.
V. Questions: Answer all questions. Limit the total word count of
your assignment to less than 3,000 words. You are encouraged to provide
necessary graphs, figures and tables with data wherever possible, which are
not subject to word limit. Please be careful in implementing referencing
1. In your own words, summarise the article. What is the main message
of this article? [8 marks]
2. According to Authors, “Where performance can only be vaguely determined,
awards have a comparative advantage over monetary incentives.”-
in light of the article and based on your own research, please explain
why the authors suggest so. Can you provide a counter example of
the above statement? What is the di?erence between the Monetary
Compensation and Awards in relation to designing of an incentive
mechanism? [8 marks]
3. Suppose you are a CEO of a garments company called ‘XYZ’. In your
company, there are ten mangers and one thousand workers, who are
working under ten di?erent sections. Your objective is to maximise the
profit by increasing the performance of each section. Explain how do
you design an appropriate incentive mechanism to achieve your objective.
Do you provide the same incentive to both managers and workers
or di?erent incentives to di?erent levels of hierarchy ?[ 8 marks]
4. Each year we celebrate the achievement of eminent Australians through
the Australian of the Year Awards. Explain what is the main purpose
of such award and how does it influence our community? Can you
also provide two additional real world examples (other than the examples
mentioned in the attached article) where awards have significant
impacts in increasing welfare of the society? [8 marks]
5. In 2006 Nobel peace prize is awarded to Muhammad Yunus and Grameen
Bank; and in 2007 Nobel peace prize is awarded to Intergovernmental
Panel on Climate Change (IPCC) and Albert Arnold (Al) Gore Jr..
Can you explain what global norms are promoted by these awards and
how these norms may a?ect the welfare of the world? [8 marks]
Econ. Voice 2014; aop
Bruno S. Freya,* and Jana Gallusb
The Power of Awards
Abstract: Every economist worth his or her salt will tell you that monetary
compensation is more efficient than all other forms of rewards. Awards have
only received scant attention in the economics literature. Yet, they are ubiquitous.
They can take many forms and include titles, prizes, orders, medals, and
still other types of decorations. We outline the distinguishing characteristics of
awards, especially in comparison to monetary rewards, show the potential risks
and emphasize where awards are particularly useful.
Keywords: awards; incentives; intrinsic motivation; money; performance pay.
DOI 10.1515/ev-2014-0002
1 Introduction
Every economist worth his or her salt will tell you that monetary compensation
is more efficient than all other forms of rewards. Money is fungible and therefore
yields most utility to the recipient. It can be applied marginally, such that the
desired performance can (in theory) be directly induced. A second type of material
reward is non-monetary and takes the form of fringe benefits such as a company car
or a particularly attractive office. These incentives are less efficient but can nevertheless
be widely observed. This can at least partly be explained by the tax-related
advantages they provide. More recently, intrinsic motivation has been considered
as a work incentive. A fourth category – awards – has received only little attention
by economists. Exceptions are Hansen and Weisbrod’s article in the Journal
Bruno S. Frey was Professor of Economics at the University of Zurich and Distinguished
Professor of Behavioral Science at the University of Warwick. He is now Professor of Economics
at Zeppelin University and Research Director of CREMA. His research interests include the
economics of awards, the economics of happiness, and cultural economics.
Jana Gallus is a Doctoral Student and Lecturer at the University of Zurich, Switzerland. In her
research she theoretically and empirically analyzes incentives and motivation.
*Corresponding author: Bruno S. Frey, Department of Economics, University of Zurich,
Hottingerstrasse 10, 8032 Zurich, Switzerland, Tel.: +41-44-634-37-30,
Jana Gallus: Department of Economics, University of Zurich, Hottingerstrasse 10, 8032 Zurich,
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2 ? Bruno S. Frey and Jana Gallus
of Political Economy and Besley’s unpublished “Notes on Honours.” Awards can
take many forms and include titles, prizes, orders, medals, and still other types of
decorations. They clearly are extrinsic incentives, though not of a material kind.
Awards are ubiquitous in practice. They are bestowed in great numbers by
heads of state – monarchs, presidents and chancellors alike. The cultural sector
is characterized by award ceremonies such as the Oscars or Grammys. Success in
sports is crowned with medals, trophies and titles like that of the Sportsperson of
the Year. Managers are elected CEO of the Year, while workers strive to be named
Employee of the Month. Academics are eager to receive awards, too, ranging from
honorary doctorates to Fellowships of prestigious academic societies [e.g., Fellow
of the Royal Society, or Fellow of the Econometric Society, which is analyzed in
an article by Chan, Frey and Gallus (2014)]. Even the Catholic Church relies on an
elaborate system of honors, including post-mortem awards such as notably the
canonizations, which have in recent years been made great use of. As shown in a
working paper by Barro, McCleary, and McQuoid, the beatification rate (the ratio
of the number of beatified persons to a pope’s tenure) reached 12 for John Paul II
(1978–2005), while it had only been between 0 and 2 up until his tenure. Similar
increases in the number of awards bestowed are discernible in many areas.
2 Difference between Monetary Compensation
and Awards
Awards differ from pecuniary incentives in several ways. From the point of
view of the economic theory of incentives the following aspects are of primary
Giving awards is cheap. In the case of awards it is only non-monetary costs
that matter. Awards normally consist in a piece of ribbon, a trophy or a document
that can be displayed in the office. However, if too many awards are handed out
they lose their value. Choosing an unworthy candidate produces considerable
costs for the giver because of the resulting image loss. The reputation of the World
Wildlife Fund, for instance, was harmed when its Honorary President, the King of
Spain, was caught hunting elephants and needed to have his title revoked.
In a few cases awards are accompanied by a large prize purse. The winner
of an (undivided) Nobel Prize gets eight million Swedish kronor (more than one
million U.S. dollars). Yet the honor going with the Prize is far more important
than the money. It can safely be assumed that most scholars would be glad to
accept the Prize even if no money was attached to it – or that they would even
be prepared to pay for it. An important function of the money accompanying an
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The Power of Awards ? 3
award lies in establishing its seriousness. However, the sum of money is no guarantee
that a prize will enjoy commensurate prestige. Thus, the Balzan Prize for
Humanity, Peace and Fraternity Among Peoples, bestowed every 3–5 years, enjoys
far lower prestige than the Nobel Prize though the winner receives even 2 million
Swiss francs (more than 2 million U.S. dollars).
Where performance can only be vaguely determined, awards have a comparative
advantage over monetary incentives. “Performance pay” is appropriate only
if the performance criteria are precisely determined and measured. This prerequisite
is, however, rarely met in the case of complex activities, as argued by Osterloh
and Frey in an article in Organization Science. If variable performance pay is
applied, the giver must concentrate on those parts of the performance that are
measurable. As a result, the potential recipients are induced to behave in a strategic
way and perform well only in those dimensions that are measured. For this
reason, principal agent theory increasingly favors “encompassing” performance
evaluations. Under some conditions, as shown by Holmström and Milgrom in
the Journal of Law, Economics, and Organization, it is even better not to provide
any explicit incentives. In that case, work effort is upheld only if work morale
happens to stay high.
Awards can be used when monetary compensation would induce strategic
behavior. They allow the principal to take into account non-contractible activities,
such as helping a colleague. Awards are meant to honor general forms of performance,
as is the case with Lifetime Achievement Awards given, for example, at
film festivals. In many cases, the Nobel Prize is bequeathed for a life’s work rather
than for a specific research success achieved in the preceding year (although this
would correspond to the original intent of the founder).
Awards fulfill an important signaling function, which is analyzed in detail in a
paper by Frey and Gallus (2014). They are particularly valuable for their recipients
when revealing their talent and commitment, allowing award winners to engage
in beneficial new commercial and personal relationships. By bequeathing awards,
the givers also send signals about themselves. They can use the awards to show
which values they honor. Given the publicity and the important ceremonial component
of award programs, they can also be employed for public relations aims.
Under specific conditions, monetary payments reduce work effort. They
crowd out intrinsic motivation if performance measurement is perceived as controlling.
If this crowding-out effect is stronger than the relative price effect, the
incentive will even induce a decrease in performance. Giving money may moreover
distort the positive signaling effect of “good deeds.” It becomes unclear
whether the action was undertaken for its own sake, or with the goal of receiving
the money in return. The net effect on performance therefore can be positive or
negative. These considerations constitute a considerable extension of standard
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4 ? Bruno S. Frey and Jana Gallus
economic theory. In contrast to monetary compensation, awards tend to foster
intrinsic motivation. They neither require an explicit performance measurement,
nor do they negatively affect the recipient’s self-evaluation or reduce the latter’s
self-determination. Rather, awards support their recipients’ activities as well as
their self-image.
Awards also forge special ties of loyalty. A recipient of an award enters a bond
of loyalty with the giver. Outsiders would consider accepting an award but then
turning against the giver as being inconsistent. The respective person should
have refused the award if he or she does not agree with the general views held
by the giver. The giver also accepts to establish special ties to the recipient. His or
her prestige suffers if the recipient proves to be unworthy or rejects the award. For
these reasons, award givers carefully check whether the potential recipients are
worthy and whether they are likely to accept the award.
Monetary payments do not establish any such bond of loyalty above and
beyond the performance contracted. In many cases people emphasize that they
perform a particular task solely for the money, and that they have no further connection
or obligation to the person giving the money.
3 Awards Raise Welfare
Honoring a person serves to bolster the norms of others undertaking similar
activities or upholding similar attitudes. These persons experience an improved
self-evaluation and rise in the regard of third parties, which increases their utility.
Moreover, awards can substitute for other means of getting social approval, such
as luxury consumption, which induces negative external effects. Awards change
the implicit relative price in favor of the activities they honor. They are often
used to remunerate social engagements. This allows persons engaging in similar
activities to identify themselves with the award recipients and “bask in reflected
glory.” The many awards received by Mother Teresa may serve as an example.
Honoring a person for his or her performance moreover shifts the reference point
of other persons for their own behavior. This effect can increase effort in the activity
4 Potential Risks
As awards need to be kept scarce so that they retain their value, many persons
will not be honored. Especially in the context of organizations, where the group
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The Power of Awards ? 5
of candidates who might have been awarded is clearly delineated, this risks
entailing negative reactions by non-recipients. Lower job satisfaction and performance,
refusal to cooperate, or outright sabotage may be the result. For award
bestowals to have a positive aggregate effect, givers need to take this risk into
account and make corresponding adjustments to the awards they employ (e.g.,
with respect to the number, frequency, and variety of awards bestowed).
5 Where are Awards Particularly Useful?
Awards have a comparative advantage if the conditions for performance pay –
encompassing and precise performance measurement – can be fulfilled only at
high cost, or not at all, or if a marked crowding-out effect of intrinsic motivation
is to be expected. Awards therefore play an important role in the voluntary sector.
Awards are, of course, unsuitable in many situations – as are other extrinsic
The gist of this contribution is to question the materially oriented focus on
motivation and incentives. Non-monetary rewards, in particular providing honor
through awards, should be accorded more attention in the economics literature.
The stress on monetary rewards as the most important driver of motivation is illconceived.
Rather than focusing on variations of material incentives, decisionmakers
should think about how to motivate people by conferring honors.
References and Further Reading
Barro, Robert J., Rachel M. McCleary, and Alexander McQuoid. 2010. “Economics of Sainthood
(a preliminary investigation).” Available online:
barro/files/Saints/% 2Bpaper/%2B020910.pdf.
Besley, Timothy. 2005. Notes on Honours. Mimeo: London School of Economics.
Chan, Ho F., Bruno S. Frey, Jana Gallus, and Benno Torgler. 2014. “Academic Honors and
Performance.” Labour Economics, Forthcoming.
Frey, Bruno S., and Jana Gallus. 2014. “Awards are a Special Kind of Signal.” CREMA Working
Paper Number 2014–04.
Hansen, W. Lee, and Burton A. Weisbrod. 1972. “Toward a General Theory of Awards, or, do
Economists Need a Hall of Fame?” Journal of Political Economy March–April, 422–431.
Holmström, Bengt, and Paul Milgrom. 1991. “Multitask Principal-Agent Analyses: Incentive
Contracts, Asset Ownership, and Job Design.” Journal of Law, Economics, and
Organization, January, 24–52.
Osterloh, Margit, and Bruno S. Frey. 2000. “Motivation, Knowledge Transfer, and
Organizational Forms.” Organization Science, September–October, 538–550.
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