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Gaming and Strategic Ambiguity in Incentive Provision

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  • Ederer, Florian
  • Holden, Richard
  • Meyer, Margaret A

Abstract

It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments. Ambiguous incentive schemes induce more balanced e fforts from an agent who performs multiple tasks and is better informed about the environment, but also impose more risk on the agent. If tasks are sufficiently complementary for the principal, ambiguous schemes can dominate the best deterministic scheme and can completely eliminate the efficiency losses from the agent's better knowledge of the environment.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9319.

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Date of creation: Jan 2013
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Handle: RePEc:cpr:ceprdp:9319

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Keywords: ambiguity; contracts; gaming; incentives; randomization;

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  1. Ratto, Marisa & Tominey, Emma & Propper, Carol & Burgess, Simon M., 2012. "Incentives in the Public Sector: Evidence from a Government Agency," Economics Papers from University Paris Dauphine 123456789/12197, Paris Dauphine University.
  2. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-77, September.
  3. Andrew Healy & Jennifer Pate, 2011. "Can Teams Help to Close the Gender Competition Gap?," Economic Journal, Royal Economic Society, vol. 121(555), pages 1192-1204, 09.
  4. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
  5. Scott E. Carrell & James E. West, 2010. "Does Professor Quality Matter? Evidence from Random Assignment of Students to Professors," Journal of Political Economy, University of Chicago Press, vol. 118(3), pages 409-432, 06.
  6. Englmaier, Florian & Roider, Andreas & Sunde, Uwe, 2012. "The Role of Salience in Performance Schemes: Evidence from a Field Experiment," CEPR Discussion Papers 8921, C.E.P.R. Discussion Papers.
  7. Sandeep Baliga & Tomas Sjöström, 2008. "Strategic Ambiguity and Arms Proliferation," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1023-1057, December.
  8. David Rahman, 2012. "But Who Will Monitor the Monitor?," American Economic Review, American Economic Association, vol. 102(6), pages 2767-97, October.
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Cited by:
  1. David Rahman, 2012. "But Who Will Monitor the Monitor?," American Economic Review, American Economic Association, vol. 102(6), pages 2767-97, October.

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