Contracts for Agents with Biased Beliefs: Some Theory and an Experiment
AbstractThis 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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Bibliographic InfoPaper provided by Brown University, Department of Economics in its series Working Papers with number 2011-10.
Date of creation: 2011
Date of revision:
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Postal: Department of Economics, Brown University, Providence, RI 02912
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-02 (All new papers)
- NEP-CBE-2011-08-02 (Cognitive & Behavioural Economics)
- NEP-CTA-2011-08-02 (Contract Theory & Applications)
- NEP-EXP-2011-08-02 (Experimental Economics)
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