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How Unjust! An Experimental Investigation of Supervisors' Evaluation Errors and Agents' Incentives

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Author Info

  • Marchegiani, Lucia

    ()
    (University of Rome 3)

  • Reggiani, Tommaso

    ()
    (University of Cologne)

  • Rizzolli, Matteo

    ()
    (Free University of Bozen/Bolzano)

Abstract

In our simple model the supervisor: i) cannot observe the agent's effort; ii) aims at inducing the agent to exert high effort; but iii) can only offer rewards based on performance. Since performance is only stochastically related to effort, evaluation errors may occur. In particular, deserving agents that have exerted high effort may not be rewarded (Type I errors) and undeserving agents that have exerted low effort may be rewarded (Type II errors). We show that, although the model predicts both errors to be equally detrimental to performance, this prediction fails with a lab experiment. In fact, failing to reward deserving agents is significantly more detrimental than rewarding undeserving agents. We discuss our result in the light of some economic and managerial theories of behavior. Our result may have interesting implications for strategic human resource management and personnel economics and may also contribute to the debate about incentives and organizational performance.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6254.

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Length: 33 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:iza:izadps:dp6254

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Related research

Keywords: agency theory; organizational justice; compensation; type I and type II errors; real effort;

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References

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  1. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
  2. Johannes Abeler & Armin Falk & Lorenz Goette & David Huffman, 2011. "Reference Points and Effort Provision," American Economic Review, American Economic Association, vol. 101(2), pages 470-92, April.
  3. Fehr, Ernst & Klein, Alexander & Schmidt, Klaus M., 2007. "Fairness and contract design," Munich Reprints in Economics 20618, University of Munich, Department of Economics.
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  7. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
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  12. Caplan, Arthur J. & Aadland, David & Macharia, Anthony, 2010. "Estimating Hypothetical Bias in Economically Emergent Africa: A Generic Public Good Experiment," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 39(2), April.
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Cited by:
  1. Sabatini, Fabio & Modena, Francesca & Tortia, Ermanno, 2012. "Do cooperative enterprises create social trust?," MPRA Paper 39814, University Library of Munich, Germany.

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