Pay-for-performance incentives and individual creativity: Experimental evidence

Creativity is economically important, but is one of many goals in a typical busi- ness environment. A crucial question facing firms is how direct financial incentives on creativity affect performance in other goals. I use an experiment where participants complete a novel task that can vary in two dimensions (creativity and cost efficiency), and face pay-for-performance incentives specific to one dimension only. Using a novel content-based measure of creativity, I find that creativity-specific incentives have positive direct effects, with no evidence of negative spillover effects on cost efficiency. I develop a framework that describes how individuals search the two-dimensional space for optimal solutions, and use it to estimate parameters related to search behaviour, allowing for unrestricted heterogeneity across individuals. The willingness to experiment is a key factor in explaining variations in creativity, whether it is measured via personality traits related to risk-taking and experimentation, or via estimated parameters from my model. Both the reduced-form and structural estimation results suggest that when there are other goals besides creativity, intermediate levels of experimentation are optimal.