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Performance Measurement, Expectancy and Agency Theory: An Experimental Study

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Author Info

  • Randolph Sloof

    ()
    (Faculty of Economics and Econometrics, Universiteit van Amsterdam)

  • Mirjam van Praag

    ()
    (Faculty of Economics and Econometrics, Universiteit van Amsterdam)

Abstract

Theoretical analyses of (optimal) performance measures are typically performed within the realm of the linear agency model. This model implies that, for a given compensation scheme, the agent’s optimal effort is unrelated to the amount of noise in the performance measure. In contrast, expectancy theory as developed by psychologists predicts lower effort levels for noisier performance measures. We conduct a real effort laboratory experiment and find that effort levels are invariant to changes in the distribution of the noise term. This suggests that enriching the economic model commonly applied within this area by including an expectancy parameter is not needed. This discussion paper has resulted in an article in the Journal of Economic Behavior & Organization , 67(3-4), 794-809.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 05-026/1.

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Date of creation: 21 Sep 2007
Date of revision: 22 Sep 2007
Handle: RePEc:dgr:uvatin:20050026

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Web page: http://www.tinbergen.nl

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Keywords: Expectancy theory; agency theory; performance measurement; experiments;

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  1. Loewenstein, George, 1999. "Experimental Economics from the Vantage-Point of Behavioural Economics," Economic Journal, Royal Economic Society, vol. 109(453), pages F23-34, February.
  2. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  3. Frans van Dijk & Joep Sonnemans & Frans van Winden, 1998. "Incentive Systems in a Real Effort Experiment," Tinbergen Institute Discussion Papers 98-023/1, Tinbergen Institute.
  4. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
  5. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  6. Wolfstetter,Elmar, 2000. "Topics in Microeconomics," Cambridge Books, Cambridge University Press, number 9780521645348, October.
  7. Zabojnik, Jan, 1996. "Pay-performance sensitivity and production uncertainty," Economics Letters, Elsevier, vol. 53(3), pages 291-296, December.
  8. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  9. George Baker, 2002. "Distortion and Risk in Optimal Incentive Contracts," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 728-751.
  10. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
  11. Pingle, Mark, 1997. "Submitting to authority: Its effect on decision-making," Journal of Economic Psychology, Elsevier, vol. 18(1), pages 45-68, February.
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Citations

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Cited by:
  1. Randolph Sloof & C. Mirjam van Praag, 2008. "The Effect of Noise in a Performance Measure on Work Motivation," Tinbergen Institute Discussion Papers 08-074/1, Tinbergen Institute.
  2. Sloof, Randolph & van Praag, C. Mirjam, 2010. "The effect of noise in a performance measure on work motivation: A real effort laboratory experiment," Labour Economics, Elsevier, vol. 17(5), pages 751-765, October.
  3. Randolph Sloof & C. Mirjam van Praag, 2008. "The Effect of Noise in a Performance Measure on Work Motivation," Tinbergen Institute Discussion Papers 08-074/1, Tinbergen Institute.

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