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The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures

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  • Jeannette Brosig

    ()
    (University of Duisburg-Essen)

  • Christian Lukas

    ()
    (University of Konstanz)

  • Thomas Riechmann

    ()
    (University of Kaiserslautern)

Abstract

Non-monotone incentive structures, which - according to theory - are able to induce optimal behavior, are often regarded as empirically less relevant for labor relationships. We compare the performance of a theoretically optimal non-monotone contract with a monotone one under controlled laboratory conditions. Implementing some features relevant to real-world employment relationships, our paper demonstrates that, in fact, the frequency of income-maximizing decisions made by agents is higher under the monotone contract. Although this observed behavior does not change the superiority of the non-monotone contract for principals, they do not choose this contract type in a significant way. This is what we call the monotonicity puzzle. Detailed investigations of decisions provide a clue for solving the puzzle and a possible explanation for the popularity of monotone contracts.

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Bibliographic Info

Article provided by German Academic Association for Business Research in its journal BuR - Business Research.

Volume (Year): 3 (2010)
Issue (Month): 1 (May)
Pages: 8-35

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Handle: RePEc:vhb:journl:v:3:y:2010:i:1:p:8-35

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Keywords: experimental agency; non-monotone contracts;

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