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The effect of incentive structure on search in the secretary problem

Published online by Cambridge University Press:  01 January 2023

Yu-Chin Hsiao*
Affiliation:
University of Canterbury & Macquarie Graduate School of Management
Simon Kemp
Affiliation:
University of Canterbury
*
* Correspondence concerning this article should be addressed to Yu-Chin Hsiao, Psychology Department, University of Canterbury, Private Bag 4800, Christchurch, New Zealand. Email: hsiao.annie@gmail.com.
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Abstract

We tested the effectiveness of performance-based incentive structures using three incentive structures — commission base, best only and flat fee — and two levels of context — no context and house-selling — in an experiment in which participants made decisions in a variant of the secretary problem. Key measures of performance were the amount of search and the rounds in which the very best (optimal) offer was chosen. We found that having a commission-based proportional incentive did not produce better performance than having a flat payment for any of the performance measures considered. However, another performance-based incentive — the best only — increased the length of their searches and led to more optimal offers. These results applied both when there was no context and when the context was selling a house.

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Type
Research Article
Creative Commons
Creative Common License - CCCreative Common License - BY
The authors license this article under the terms of the Creative Commons Attribution 3.0 License.
Copyright
Copyright © The Authors [2020] This is an Open Access article, distributed under the terms of the Creative Commons Attribution license (http://creativecommons.org/licenses/by/3.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Figure 0

Table 1: Descriptive statistics of position in the sequence at which the offer was accepted averaging across 10 rounds (Panel A) and the number of rounds the optimal offer was selected (Panel B) for the conditions

Figure 1

Table 2: Kendall’s tau correlation coefficients for the positions in the sequence at which the offer was accepted in each round. In Panel A, the best only was dummy coded as 1 and the other two incentives as 0. Panel B, commission base was dummy coded with 1 and flat fee as 0. (Coef. shows the correlation coefficient of stopping position in each round.)

Figure 2

Figure 1: Path diagram of the chosen price and the number of rounds the optimal offer is selected. The beta coefficient is shown for each path, and * shows the path is significant at 0.05 level. Commission base and best only were dummy coded with these structures as 1 and the other two incentives as 0. Context was coded as No context = 1; House selling = 0.

Figure 3

Figure A1. The frequency of finding the optimal offer and the stopping position for all decision strategies.

Figure 4

Figure A2. The chosen price and the stopping position for all decision strategies.

Figure 5

Table B1 Participant data for the condition groups

Figure 6

Table C1 Time taken (minutes)

Figure 7

Table D1 The actual price offer sequences used in the experiment

Figure 8

Table E1 Predicted stopping position for each round after applying the classical strategy. Note. For 20 offers, the classical strategy indicates participants should choose none of the first 7 offers and from offer 8 onwards choose the first offer that exceeds any seen so far

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