[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/4464.html
   My bibliography  Save this paper

Fairness and Incentives in a Multi-Task Principle-Agent Model

Author

Listed:
  • Schmidt, Klaus
  • Fehr, Ernst
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.

Suggested Citation

  • Schmidt, Klaus & Fehr, Ernst, 2004. "Fairness and Incentives in a Multi-Task Principle-Agent Model," CEPR Discussion Papers 4464, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4464
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP4464
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 817-869.
    2. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 437-459.
    3. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
    4. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February.
    5. Martin F. Hellwig & Klaus M. Schmidt, 2002. "Discrete-Time Approximations of the Holmstrom-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision," Econometrica, Econometric Society, vol. 70(6), pages 2225-2264, November.
    6. David K. Levine, 1998. "Modeling Altruism and Spitefulness in Experiment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 593-622, July.
    7. Martin Brown & Armin Falk & Ernst Fehr, 2004. "Relational Contracts and the Nature of Market Interactions," Econometrica, Econometric Society, vol. 72(3), pages 747-780, May.
    8. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    9. Ernst Fehr & Klaus M. Schmidt, "undated". "Theories of Fairness and Reciprocity - Evidence and Economic Applications," IEW - Working Papers 075, Institute for Empirical Research in Economics - University of Zurich.
    10. W. Bentley MacLeod & Daniel Parent, 1999. "Job characteristics, wages, and the employment contract," Review, Federal Reserve Bank of St. Louis, issue May, pages 13-27.
    11. Gary E Bolton & Axel Ockenfels, 1997. "A Theory of Equity, Reciprocity, and Competition," Levine's Working Paper Archive 1889, David K. Levine.
    12. Dejong, Dv & Forsythe, R & Lundholm, Rj & Uecker, Wc, 1985. "A Laboratory Investigation Of The Moral Hazard Problem In An Agency Relationship," Journal of Accounting Research, Wiley Blackwell, vol. 23, pages 81-120.
    13. Simon Gächter & Armin Falk, 2002. "Reputation and Reciprocity: Consequences for the Labour Relation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 1-26, March.
    14. Cox, James C. & Friedman, Daniel & Gjerstad, Steven, 2007. "A tractable model of reciprocity and fairness," Games and Economic Behavior, Elsevier, vol. 59(1), pages 17-45, April.
    15. Keser, Claudia & Willinger, Marc, 2000. "Principals' principles when agents' actions are hidden," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 163-185, January.
    16. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 2001. "Reciprocity as a Contract Enforcement Device," Levine's Working Paper Archive 563824000000000143, David K. Levine.
    17. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May.
    18. George Baker & Robert Gibbons & Kevin J. Murphy, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 1125-1156.
    19. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer;Economic Science Association, vol. 5(1), pages 5-27, June.
    20. Fehr, Ernst & Klein, Alexander & Schmidt, Klaus M., 2004. "Contracts, Fairness, and Incentives," Discussion Papers in Economics 334, University of Munich, Department of Economics.
    21. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-480, March.
    22. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-328, March.
    23. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February.
    24. Charles Brown, 1990. "Firms' Choice of Method of Pay," ILR Review, Cornell University, ILR School, vol. 43(3), pages 165-1-182-, April.
    25. Werner Güth & Wolfgang Klose & Manfred Königstein & Joachim Schwalbach, 1998. "An experimental study of a dynamic principal-agent relationship," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 327-341.
    26. Werner Güth & Manfred Königstein & Judit Kovács & Enikõ Zala-Mezõ, 2001. "Fairness Within Firms: The Case Of One Principal And Multiple Agents," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 53(2), pages 82-101, April.
    27. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ernst Fehr & Alexander Klein & Klaus M Schmidt, 2007. "Fairness and Contract Design," Econometrica, Econometric Society, vol. 75(1), pages 121-154, January.
    2. Ernst Fehr & Klaus Schmidt, 2004. "Contracts, Fairness and Incentives," Levine's Bibliography 122247000000000148, UCLA Department of Economics.
    3. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    4. Klaus M. Schmidt, 2011. "Social Preferences and Competition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 207-231, August.
    5. Fehr, Ernst & Schmidt, Klaus M., 2005. "The Economics of Fairness, Reciprocity and Altruism – Experimental Evidence and New Theories," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 66, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    6. Ernst Fehr & Simon Gaechter, "undated". "Do Incentive Contracts Crowd out Voluntary Cooperation?," IEW - Working Papers 034, Institute for Empirical Research in Economics - University of Zurich.
    7. Charness, Gary & Dufwenberg, Martin, 2003. "Promises & Partnership," Research Papers in Economics 2003:3, Stockholm University, Department of Economics.
    8. Gary Charness & Martin Dufwenberg, 2006. "Promises and Partnership," Econometrica, Econometric Society, vol. 74(6), pages 1579-1601, November.
    9. Klaus M. Schmidt, 2011. "Social Preferences and Competition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s1), pages 207-231, August.
    10. D'Agostino, Elena & Lisciandra, Maurizio, 2012. "Enforceable vs. non-enforceable contracts: a theoretical appraisal with fair players," MPRA Paper 41261, University Library of Munich, Germany.
    11. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer;Economic Science Association, vol. 5(1), pages 5-27, June.
    12. Ernst Fehr & Simon Gächter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
    13. Fehr, Ernst & Falk, Armin, 2002. "Psychological foundations of incentives," European Economic Review, Elsevier, vol. 46(4-5), pages 687-724, May.
    14. John A. List, 2006. "The Behavioralist Meets the Market: Measuring Social Preferences and Reputation Effects in Actual Transactions," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 1-37, February.
    15. Shchetinin, Oleg, 2009. "Contracting Under Reciprocal Altruism," Working Papers in Economics 421, University of Gothenburg, Department of Economics.
    16. Jordi Brandts & Arno Riedl & Frans van Winden, 2004. "Competition and Well-Being," Working Papers 120, Barcelona School of Economics.
    17. Irlenbusch, Bernd & Sliwka, Dirk, 2005. "Incentives, Decision Frames, and Motivation Crowding Out – An Experimental Investigation," IZA Discussion Papers 1758, Institute of Labor Economics (IZA).
    18. Sebastian Kube & Michel Andre Marechal & Clemens Puppe, 2012. "The Currency of Reciprocity: Gift Exchange in the Workplace," American Economic Review, American Economic Association, vol. 102(4), pages 1644-1662, June.
    19. Ernst Fehr & Susanne Kremhelmer & Klaus M. Schmidt, 2008. "Fairness and the Optimal Allocation of Ownership Rights," Economic Journal, Royal Economic Society, vol. 118(531), pages 1262-1284, August.
    20. Johannes Becker & Daniel Hopp & Karolin Süß, 2020. "How Altruistic Is Indirect Reciprocity? - Evidence from Gift-Exchange Games in the Lab," CESifo Working Paper Series 8423, CESifo.

    More about this item

    Keywords

    Incentives; Moral hazard; Multiple tasks; Fairness; Experiments;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:4464. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.