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

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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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  • Anja Sautmann, 2011. "Contracts for Agents with Biased Beliefs: Some Theory and an Experiment," Working Papers 2011-10, Brown University, Department of Economics.
    • Handle: RePEc:bro:econwp:2011-10
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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.

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