Peer Evaluation and Team Performance: An Experiment on Complex Problem Solving

Today’s employees often work in teams on complex problems. Yet, we know very little about how to incentivize such work. We conduct two laboratory experiments where groups of three work on a complex task and are paid by the quality of their answer. We then study whether a peer evaluation which determines the individual pay share improves group performance. We do so both in an in-person as well as in an online setting. In both settings, overall group performance was not significantly affected by the peer evaluation. Yet, groups behaved differently under peer evaluation: Participants reported higher motivation and groups worked longer and communicated more. We find evidence consistent with two possible performance-reducing channels of peer evaluation tied to performance pay. First, behavior may shift toward impressing one’s team members, though this does not necessarily improve performance. Second, higher work effort because of the peer evaluation in the presence of time constraints may lead to more timeouts and incompletely worked-out solutions. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.00840 .