Incentivizing Effort Allocation Through Resource Allocation: Evidence from Scientists’ Response to Changes in Funding Policy

In this paper, we develop a formal model to investigate how resource-based incentives influence an agent’s allocation of effort. Our model shows how an agent changes the optimal allocation of a fixed amount of effort across different projects in response to changes in the effort cost of securing resources for each project. We use the insights from the model to explore the effectiveness of funding strategies designed to influence the research direction of academic scientists. Research funding is the primary lever firms and policymakers use to influence scientists’ research direction and output. However, prior research provides little theoretical insight into the effectiveness of such funding policies. We test our model’s predictions by examining how U.S. scientists working in stem cell research responded to a 2001 policy change that significantly restricted access to federal funding for research in the human embryonic stem cell (hESC) area. In line with our model’s predictions, we find that the increase in the effort cost of securing resources for hESC research inadvertently reduced U.S. scientists’ output in non-hESC areas of stem cell research–an effect that is strongest among the highest ability scientists. Our model and findings highlight the complexities of incentivizing effort allocation using resource-based incentives. In particular, we show how altering resource-based incentives in one area can have unforeseen spillover effects on effort allocation in other areas.