KNIGHT FEVER TOWARDS AN ECONOMICS OF AWARDS BRUNO S. FREY CESIFO WORKING PAPER NO. 1468 CATEGORY 4: LABOUR MARKETS MAY 2005 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the CESifo website: www.CESifo.de CESifo Working Paper No. 1468 KNIGHT FEVER TOWARDS AN ECONOMICS OF AWARDS Abstract Awards in the form of orders, medals, decorations and titles are ubiquitous in monarchies and republics, private organizations, not-for-profit and profit-oriented firms. Nevertheless, economists have disregarded this kind of non-material extrinsic incentive. The demand for awards relies on an individual’s desire for distinction, and the supply of awards on the provision of incentives. Relative price and income effects are shown to be identifiable and strong. A number of empirically testable propositions are formulated. As awards are (at least so far) impossible to measure adequately, empirical tests are carried out using the technique of analytic narratives. JEL Code: D23, D73, J22, J33, L22, Z13. Keywords: incentives, motivation, awards, orders, distinction, principal-agent. Bruno S. Frey Institute for Empirical Economic Research University of Zurich Blümlisalpstr. 10 8006 Zurich Switzerland
[email protected] Part of this paper was conceived and written while I was a Distinguished Visitor at STICERD, London School of Economics. I am grateful for the support of Susanne Neckermann when writing the paper, and for enlightening discussions with, and helpful comments to earlier version of the paper to Michael Baurmann, Christine Benesch, Matthias Benz, Tim Besley, Geoffrey Brennan, Reiner Eichenberger, Christoph Engel, Nicolai Foss, Dieter Frey, Hartmut Kliemt, Barbara Krug, Lord Richard Layard, Siegwart Lindenberg, Simon Luechinger, Stephan Meier, Margit Osterloh, Friedrich Schneider, Alois Stutzer and Anna Winestein.