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If you want an incentive to appreciate the real value of economics, try this

Newspaper article

Unless you are an academic economist, you almost certainly won’t have heard of the Yrjo Jahnsson award — which is a shame because it, or at least those who win it, deserve to be much better known. It is the most prestigious award in European economics and is presented every two years to the European economist, under the age of 45, judged to have made the most significant contribution to economic research.

Previous winners include Jean Tirole, who went on to win a Nobel Prize for his work on how best to regulate firms with market power, including monopolies, and Thomas Piketty, recognised for his pathbreaking work on inequality.

This month it was announced that the joint winners of the 2019 prize are Imran Rasul and Oriana Bandiera. Like nearly half of the winners in the past 30 years, they are UK-based: the former is a professor at University College London and a colleague of mine at the Institute for Fiscal Studies; the latter, a professor at the London School of Economics.

Their work is eclectic. My personal favourite is a careful analysis that Professor Rasul carried out on the impact of a papal visit to Brazil in 1991. It resulted in a 30 per cent increase in unprotected sex and a 1.6 per cent increase in the size of the birth cohort nine months later. These are precisely estimated effects based on the very careful application of statistical techniques to appropriate data. The topic may seem a little niche, but the results are rare in providing really robust evidence on what the authors call the “persuasive effects of non-informative communication” on actual behaviour.

Elsewhere, Professor Rasul looks at the effects of the temporary “depenalisation” of cannabis use (but not supply) in the London borough of Lambeth in 2001. Using data on crimes right across 32 London boroughs and over an eight-year period, he is able to show that the policy increased cannabis-related crime in Lambeth as it moved into the borough from other parts of London. But it improved police effectiveness in dealing with other sorts of crime, with significantly fewer crimes committed and a higher clear-up rate. If the policy were implemented across London, it’s likely that at least some of the deleterious effects of the policy could be avoided because cannabis-related crime would not move to a specific area.

Their key contribution, though, has been in developing our understanding of how incentives and social relationships in the workplace affect economic and social outcomes. One of Professor Bandiera’s pathbreaking pieces of work looks at the effects of different ways of recruiting healthcare workers. She designed an experiment in which, in some areas, adverts were designed to attract those more motivated by helping people in their own communities, while in other areas the adverts emphasised opportunities for career progression. Most people’s intuition is that the former will lead to better outcomes. In fact, the latter method attracted staff who were significantly more effective in pretty much all dimensions. The point is that if you look to attract those with some ambition for their own career, you will get some applicants who both care for people and have better qualifications and broader motivation.

The joint work for which the two of them are perhaps best known looks at the effects of relating pay to performance. Simple-minded economic theory suggests that doing this should be an incentive for better performance. As you’d expect, the real world is a lot more complex.

Most workplaces are organised into teams and many incentives depend on the performance of the team you are in, not only on your own efforts. One thing that introducing performance-related incentives does, in settings where workers have a choice over who they team up with, is to change the composition of teams. The incentives make people more likely to team up with others of similar ability, rather than with their friends. This could increase productivity by matching workers of similar ability, but could reduce it if people work better in teams where they are socially connected.

Their findings are based on an experiment they designed with a fruit-picking firm. Teams of pickers were paid according to how much they produced. Both team composition and performance do, indeed, change in the face of different information and incentives. Simply providing more information about which are the more and less effective teams leads to workers sorting by ability. But this leads to a significant reduction in productivity overall. You lose the benefit of people working with their mates. If, on the other hand, you provide a big enough financial bonus to the most productive team, then overall productivity rises. In both cases, there is a large increase in the dispersion of productivity — and thus take-home pay — between teams.

If, instead, it is the managers who get the financial incentives, something else happens. Overall productivity rises, but entirely because the performance of the already most productive workers increases. The managers put more effort into improving the performance, and therefore pay, of those already doing best. So incentivising managers can increase inequality among workers.

This is part of a much bigger effort by professors Bandiera, Rasul and others to understand what drives managerial and worker behaviour and how that affects productivity and inequality. Few things matter more. And this gives just a flavour of some of the work being carried out by some of our best economists: careful, empirical, relevant, robust and on rather different issues to those you might expect.

This article was originally published in The Times and is reproduced here with full permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist.