Wage Elasticities in Working and Volunteering: The Role of Reference Points in a Laboratory Study

by Christine Exley & Stephen Terry

Executive Summary — Nonprofit organizations often rely on reference points—explicit or implicit targets and goals—to encourage more effort from volunteers. This study finds that effort does tend to cluster around reference levels, so this may be perceived as a very effective strategy. Yet reference levels can potentially backfire: in response to higher volunteer wages or productivity, volunteers may reduce their effort so as to meet the reference level.

Author Abstract

Volunteers provide a large source of labor in the United States, yet volunteer effort is often unresponsive to traditional incentives. To clarify the sources of this unresponsiveness within volunteering, we appeal to a classic explanation: targeting behavior. In particular, we provide a laboratory test of effort response to changes in wages, either accrued to individuals or to a charity, in the presence of expectations-based reference points or targets. When individuals earn money for themselves, higher wages lead to higher effort with relatively muted targeting behavior. When individuals earn money for a charity, higher wages instead lead to lower effort with substantial targeting behavior. For managers contemplating the use of performance goals or targets within nonprofit organizations, our results suggest careful consideration about the extent to which they may render other incentives less effective.

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