Working Paper: CEPR ID: DP4464
Authors: Ernst Fehr; Klaus Schmidt
Abstract: This Paper reports on a two-task principal-agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece rate contracts. Many principals reward high efforts on both tasks with substantial bonuses. Agents anticipate this and provide high efforts on both tasks. In contrast, almost all agents with a piece-rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behaviour contradicts the self-interest theory but is consistent with theories of fairness.
Keywords: experiments; fairness; incentives; moral hazard; multiple tasks
JEL Codes: C70; C90; J30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bonus contracts (J33) | agent effort levels (L85) |
| piece rate contracts (J33) | agent effort levels (L85) |
| contract type (K12) | agent behavior (L85) |
| fairness and reciprocity (D63) | agent responses (L85) |
| principals choosing bonus contracts (M52) | high effort levels from agents (L85) |
| agents under piece rate contracts (J33) | focus on first task (E61) |
| agents under bonus contracts (J33) | allocate efforts evenly across tasks (J29) |
| concerns for fairness (D63) | serve as enforcement device (K40) |