Working Paper: NBER ID: w19645
Authors: C. Kirabo Jackson; Henry S. Schneider
Abstract: Moral hazard is endemic to employment relationships and firms often use performance pay and managerial control to address this problem. While performance pay has received much empirical attention, managerial control has not. We analyze data from a managerial-control field experiment in which an auto-repair firm provided detailed checklists to mechanics and monitored their use. Revenue was 20 percent higher under the experiment. We compare this effect to that of quasi-experimental increases in mechanic commission rates. The managerial-control effect is equivalent to that of a 10 percent commission increase. We find evidence of complementarities between the two, suggesting benefits from an all-of-the-above approach. We also find evidence of incentive gaming under performance pay.
Keywords: moral hazard; managerial control; performance pay; employment relationships; field experiment
JEL Codes: D0; D82; D86; H0; J0; J33; J41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 10% increase in commission rates (M52) | higher revenue (H27) |
| managerial control + higher commission rates (M52) | larger effect on revenue (H27) |
| performance pay (J33) | higher revenue (H27) |
| performance pay (J33) | undesirable behaviors among mechanics (L62) |
| increased managerial control (M54) | higher revenue (H27) |
| commission increase (M52) | higher revenue (H27) |