The Interaction between Financial Incentives and Task-specific Cognitive Capital: More Evidence in Support of Camerer and Hogarth (1999)

This paper extends existing evidence on the interaction between financial incentives and cognitive capital. I focus on the impact of task-specific cognitive capital, the role of which is central to the capital-labor-production framework of Camerer and Hogarth (1999) and has long been studied in cognitive science and behavioral decision research. Using a task situated in an accounting setting, I show that both financial incentives and task-specific cognitive capital, and especially their interaction, matter for performance. In particular, the effect of task-specific cognitive capital on performance is stronger under performance-based financial incentives as compared to flatrate incentives. The interaction effect arises because performance-based financial incentives lead to better performance only for individuals with more task-specific cognitive capital. I draw implications for compensation practices in experiments as well as work settings.