To illustrate the notion that people are rational and respond to incentives, consider an experiment conducted by the managers of a Chinese factory that produces electronic products such as GPS navigation devices and notebook computers. Workers were divided into three groups: Workers in the control group were simply paid their regular wages, while workers in the second and third groups (treatment groups) were promised a bonus of about $12 if their weekly output exceeded a production target. For the two treatment groups, the language of the bonus was slightly different. Workers in the reward group were simply told that if they met the target they would get the bonus. Workers in the punishment group were told that they had tentatively been awarded the bonus, but that they would lose the bonus if their output fell short of the production target.
The results of this experiment revealed the power __ and the subtleties of ___ incentives. Compared to the control group, the output of workers in the treatment groups was on average 7 percent higher. In other words, the possibility of a bonus increased productivity by 7 percent. Among the workers in the two treatment groups, productivity was on average 1 percent higher for workers in the punishment group. This suggests that the fear of a loss provides a greater incentive than prospect of a gain.