For the duration of this experiment, assume you are a division manager in a firm that manufactures a variety of products. In addition to your division, your firm has a second division that is the same size as yours and is managed by your other group member in this experiment.
During each of four 4-minute timed periods, you and the other division manager will be completing the same task in which you will decode strings of letters into numbers using an on-screen decoding key. A timer will also be provided so that you know how much time remains in the period as you work on this task. Your compensation for this task will be determined by your division’s profitability in one randomly selected period of the four you will complete, and will be calculated as follows:
| Net income generated by your decoding work |
| - Allocated common costs |
| = Division Profit |
In any particular period, there is a 40% chance that an event will occur in your division that will cause production difficulties for that period only (and thus, there is a 60% chance that the event will not occur). The occurrence of this event will be determined by a random computer-generated draw, and you will find out if the event occurred at the beginning of the work period. A separate random draw will be made for the occurrence of this event in your firm’s other division each period as well.
If this event occurs in a particular period in your division, the net income generated for your division by your decoding work will be calculated as:
60 + 4 × the number of strings you correctly decode in the period.
For example, if you correctly decode 15 strings in a period in which the event occurs, the net income generated for your division would be (60 + 4 × 15) = 120.
If the event does not occur in a particular period, the net income generated for your division by your decoding work will be calculated as:
60 + 9 × the number of strings you correctly decode in the period.
For example, if you correctly decode 15 strings in a period in which the event does not occur, the net income generated for your division would be (60 + 9 × 15) = 195.
{% elif condition == 1 or condition == 2 %}The net income generated for your division by your decoding work will be calculated as:
60 + 7 × the number of strings you correctly decode in the period.
For example, if you correctly decode 15 strings in a period, the net income generated for your division would be (60 + 7 × 15) = 165.
{% endif %}As noted above, your division’s profitability each period is also affected by your firm’s common support costs, which are allocated (or divided up) between divisions. {% if condition == 2 or condition == 4 %} Your firm has decided to allocate these costs, which total 100 (m) each period, to each of the two divisions equally (50 each). This means that the costs you are allocated do not depend on the net income generated in your division or the net income generated in your group member’s division.{% else %} Your firm has decided to allocate these costs, which total 100 (m) each period, to each of the two divisions based on the portion of firm net income generated by the division for the period. For example, suppose your work generates net income of 60 in your division and the other division manager's work generates net income of 90 in their division. Total firm net income for the period would be (60 + 90 = ) 150, of which your division generated 40% (60 / 150). Your division would be allocated 40% of the common costs of 100, or 40, while the other division would be allocated 60% of the common costs, or 60. Thus, the costs you are allocated depend on both the net income generated in your division and the net income generated in your group member’s division.{% endif %}
After completing your decoding work in each period, you will learn your division’s results for the period, as well as the other division’s results. These results will illustrate each division’s overall profit for the period. You and your other group member will repeat this process for four periods.
Your compensation for this task will then be determined based on your division’s profit in one randomly-selected period. Your division’s profit will be converted to dollars ($) for this payment as follows:
Compensation = Division profit × $0.03
For illustrative purposes, consider the following compensation examples:
{% if condition == 1 or condition == 2 %}1. In the randomly-selected compensation period, a participant correctly decodes 15 strings, so the participant’s work generates net income of 60 + 7 × 15 = 165. The participant’s other group member generates net income of 109 in the same period. Compensation is then determined in the following way:
{% if condition == 1 %}Total firm net income = 165 + 109 = 274
{% endif %} {% elif condition == 3 %}1. In the randomly-selected compensation period, a participant correctly decodes 15 strings. No event occurs that causes production difficulties, so the participant’s work generates net income of 60 + 9 × 15 = 195. The participant’s other group member generates net income of 132 in the same period. Compensation is then determined in the following way:
Total firm net income = 195 + 132 = 327
{% elif condition == 4 %}1. In the randomly-selected compensation period, a participant correctly decodes 15 strings. No event occurs that causes production difficulties, so the participant’s work generates net income of 60 + 9 × 15 = 195. The participant’s other group member generates net income of 123 in the same period. Compensation is then determined in the following way:
{% endif %} {% if condition == 1 or condition == 3 %}| Participant's Division: | Other Division: | |
| Proportion of firm net income (The basis for allocating common costs) |
60% {% if condition == 1 %}(165 / 274){% elif condition == 3 %}(195 / 327){% endif %} | 40% {% if condition == 1 %}(109 / 274){% elif condition == 3 %}(132 / 327){% endif %} |
| Division Profitability: | ||
| Net Income from decoding | {% if condition == 1 or condition == 2 %}165{% elif condition == 3 or condition == 4 %}195{% endif %} | {% if condition == 1 or condition == 2 %}109{% elif condition == 3 %}132{% elif condition == 4 %}123{% endif %} |
| - Allocated common costs {% if condition == 2 or condition == 4 %}split evenly{% endif %} | {% if condition == 1 or condition == 3 %}60 (60% × 100){% elif condition == 2 or condition == 4 %}50{% endif %} | {% if condition == 1 or condition == 3 %}40 (40% × 100){% elif condition == 2 or condition == 4 %}50{% endif %} |
| = Profit | {% if condition == 1 %}105{% elif condition == 2 %}115{% elif condition == 3 %}135{% elif condition == 4 %}145{% endif %} | {% if condition == 1 %}69{% elif condition == 2 %}59{% elif condition == 3 %}82{% elif condition == 4 %}73{% endif %} |
The participant’s compensation for this task would be (per the conversion above): {% if condition == 1 %}$3.15{% elif condition == 2 %}$3.45{% elif condition == 3 %}$4.05{% elif condition == 4 %}$4.35{% endif %}.
The participant’s other group member’s compensation for this task would be: {% if condition == 1 %}$2.07{% elif condition == 2 %}$1.77{% elif condition == 3 %}$2.46{% elif condition == 4 %}$2.19{% endif %}.
2. In the randomly-selected compensation period, a participant correctly decodes 20 strings, so the participant’s work generates net income of 60 + 7 × 20 = 200. The participant’s other group member generates net income of 200 in the same period. Compensation is then determined in the following way:
{% if condition == 1 %}Total firm net income = 200 + 200 = 400
{% endif %} {% elif condition == 3 %}2. In the randomly-selected compensation period, a participant correctly decodes 16 strings. No event occurs that causes production difficulties, so the participant’s work generates net income of 60 + 9 × 16 = 204. The participant’s other group member generates net income of 204 in the same period. Compensation is then determined in the following way:
Total firm net income = 204 + 204 = 408
{% elif condition == 4 %}2. In the randomly-selected compensation period, a participant correctly decodes 16 strings. No event occurs that causes production difficulties, so the participant’s work generates net income of 60 + 9 × 16 = 204. The participant’s other group member generates net income of 204 in the same period. Compensation is then determined in the following way:
{% endif %} {% if condition == 1 or condition == 3 %}| Participant's Division: | Other Division: | |
| Proportion of firm net income (The basis for allocating common costs) |
50% {% if condition == 1 %}(200 / 400){% elif condition == 3 %}(204 / 408){% endif %} | 50% {% if condition == 1 %}(200 / 400){% elif condition == 3 %}(204 / 408){% endif %} |
| Division Profitability: | ||
| Net Income from decoding | {% if condition == 1 or condition == 2 %}200{% elif condition == 3 or condition == 4 %}204{% endif %} | {% if condition == 1 or condition == 2 %}200{% elif condition == 3 %}204{% elif condition == 4 %}204{% endif %} |
| - Allocated common costs {% if condition == 2 or condition == 4 %}split evenly{% endif %} | {% if condition == 1 or condition == 3 %}50 (50% × 100){% elif condition == 2 or condition == 4 %}50{% endif %} | {% if condition == 1 or condition == 3 %}50 (50% × 100){% elif condition == 2 or condition == 4 %}50{% endif %} |
| = Profit | {% if condition == 1 %}150{% elif condition == 2 %}150{% elif condition == 3 %}154{% elif condition == 4 %}154{% endif %} | {% if condition == 1 %}150{% elif condition == 2 %}150{% elif condition == 3 %}154{% elif condition == 4 %}154{% endif %} |
The participant’s compensation for this task would be (per the conversion above): {% if condition == 1 %}$4.50{% elif condition == 2 %}$4.50{% elif condition == 3 %}$4.62{% elif condition == 4 %}$4.62{% endif %}.
The participant’s other group member’s compensation for this task would be: {% if condition == 1 %}$4.50{% elif condition == 2 %}$4.50{% elif condition == 3 %}$4.62{% elif condition == 4 %}$4.62{% endif %}.
3. In the randomly-selected compensation period, a participant correctly decodes 13 strings, so the participant’s work generates net income of 60 + 7 × 13 = 151. The participant’s other group member generates net income of 277 in the same period. Compensation is then determined in the following way:
{% if condition == 1 %}Total firm net income = 151 + 277 = 428
{% endif %} {% elif condition == 3 %}3. In the randomly-selected compensation period, a participant correctly decodes 15 strings. An event occurs that causes production difficulties, so the participant’s work generates net income of 60 + 4 × 15 = 120. The participant’s other group member generates net income of 276 in the same period. Compensation is then determined in the following way:
Total firm net income = 120 + 276 = 396
{% elif condition == 4 %}3. In the randomly-selected compensation period, a participant correctly decodes 15 strings. An event occurs that causes production difficulties, so the participant’s work generates net income of 60 + 4 × 15 = 120. The participant’s other group member generates net income of 222 in the same period. Compensation is then determined in the following way:
{% endif %} {% if condition == 1 or condition == 3 %}| Participant's Division: | Other Division: | |
| Proportion of firm net income (The basis for allocating common costs) |
{% if condition == 1 %}35% (151 / 428){% elif condition == 3 %}35% (120 / 342){% endif %} | {% if condition == 1 %}65% (277 / 428){% elif condition == 3 %}65% (222 / 342){% endif %} |
| Division Profitability: | ||
| Net Income from decoding | {% if condition == 1 or condition == 2 %}151{% elif condition == 3 %}120{% elif condition == 4 %}120{% endif %} | {% if condition == 1 or condition == 2 %}277{% elif condition == 3 %}222{% elif condition == 4 %}222{% endif %} |
| - Allocated common costs {% if condition == 2 or condition == 4 %}split evenly{% endif %} | {% if condition == 1 or condition == 3 %}35 (35% × 100){% elif condition == 2 or condition == 4 %}50{% endif %} | {% if condition == 1 or condition == 3 %}65 (65% × 100){% elif condition == 2 or condition == 4 %}50{% endif %} |
| = Profit | {% if condition == 1 %}116{% elif condition == 2 %}101{% elif condition == 3 %}85{% elif condition == 4 %}70{% endif %} | {% if condition == 1 %}212{% elif condition == 2 %}227{% elif condition == 3 %}206{% elif condition == 4 %}172{% endif %} |
The participant’s compensation for this task would be (per the conversion above): {% if condition == 1 %}$3.48{% elif condition == 2 %}$3.03{% elif condition == 3 %}$2.55{% elif condition == 4 %}$2.10{% endif %}.
The participant’s other group member’s compensation for this task would be: {% if condition == 1 %}$6.36{% elif condition == 2 %}$6.81{% elif condition == 3 %}$4.71{% elif condition == 4 %}$5.16{% endif %}.
Your total compensation for the experiment will include the compensation from this task, as well as your $2.00 participation fee.
Please proceed to complete a brief quiz to test your understanding of these instructions.