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Contracts for Agents with Biased Beliefs: Some Theory and an Experiment

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Abstract

This paper experimentally tests the predictions of a principal-agent model in which the agent has biased beliefs about his ability. Overcon dent workers are found to earn lower wages than undercon dent ones because they overestimate their expected payo , and principals adjust their o ers accordingly. Moreover, the pro t-maximizing contract distorts e ort by varying incentives according to self-con dence, although only the most successful principals use this strategy. These ndings have implications for the labor market; in particular, self-con dence is often correlated with gender, implying that principals would prefer to hire men over women simply because they are more overcon dent.

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Paper provided by Brown University, Department of Economics in its series Working Papers with number 2011-10.

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Date of creation: 2011
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Handle: RePEc:bro:econwp:2011-10

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Postal: Department of Economics, Brown University, Providence, RI 02912

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  1. Hanming Fang & Giuseppe Moscarini, 2004. "Morale Hazard," Yale School of Management Working Papers ysm386, Yale School of Management.
  2. Jeremy Clark & Lana Friesen, 2006. "Overconfidence in Forecasts of Own Performance: An Experimental Study," Working Papers in Economics 06/09, University of Canterbury, Department of Economics and Finance.
  3. Eliaz, Kfir & Spiegler, Ran, 2008. "Consumer optimism and price discrimination," Theoretical Economics, Econometric Society, vol. 3(4), December.
  4. de la Rosa, Leonidas Enrique, 2011. "Overconfidence and moral hazard," Games and Economic Behavior, Elsevier, vol. 73(2), pages 429-451.
  5. Vital Anderhub & Simon Gaechter & Manfred Koenigstein, . "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," IEW - Working Papers 018, Institute for Empirical Research in Economics - University of Zurich.
  6. Luís Santos-Pinto, 2008. "Positive Self-image and Incentives in Organisations," Economic Journal, Royal Economic Society, vol. 118(531), pages 1315-1332, 08.
  7. Kfir Eliaz & Ran Spiegler, 2007. "A Mechanism-Design Approach to Speculative Trade," Econometrica, Econometric Society, vol. 75(3), pages 875-884, 05.
  8. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  9. Muriel Niederle & Lise Vesterlund, 2005. "Do Women Shy Away from Competition? Do Men Compete too Much?," Discussion Papers 04-030, Stanford Institute for Economic Policy Research.
  10. Augustin Landier & David Thesmar, 2009. "Financial Contracting with Optimistic Entrepreneurs," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 117-150, January.
  11. Tobias Adrian & Mark M. Westerfield, 2008. "Disagreement and learning in a dynamic contracting model," Staff Reports 269, Federal Reserve Bank of New York.
  12. Eliaz, Kfir & Spiegler, Ran, 2009. "Bargaining over bets," Games and Economic Behavior, Elsevier, vol. 66(1), pages 78-97, May.
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Cited by:
  1. Thoma, Carmen, 2013. "Is Underconfidence Favored over Overconfidence? An Experiment on the Perception of a Biased Self-Assessment," Discussion Papers in Economics 17460, University of Munich, Department of Economics.
  2. Ian Larkin & Stephen Leider, 2012. "Incentive Schemes, Sorting, and Behavioral Biases of Employees: Experimental Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 184-214, May.
  3. Lucia Marchegiani & Tommaso Reggiani & Matteo Rizzolli, 2013. "Severity vs. Leniency Bias in Performance Appraisal: Experimental evidence," BEMPS - Bozen Economics & Management Paper Series BEMPS01, School of Economics and Management at the Free University of Bozen.

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