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On the Incentive Effects of Uncertainty in Monitoring Agents - A Theoretical and Experimental Analysis

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Author Info

  • Judith Avrahami
  • Werner Güth

    ()
    (Max-Planck Institute of Economics, Strategic Interaction Group, Jena, Germany)

  • Yaakov Kareev
  • Tobias Uske

    ()
    (Max-Planck Institute of Economics, Strategic Interaction Group, Jena, Germany)

Abstract

When two or more agents compete for a bonus and the agents' productivity in each of several possible occurrences depends stochastically on (constant) effort, the number of times that are checked to assign the bonus affects the level of uncertainty in the selection process. Uncertainty, in turn, is expected to increase the efforts made by competing agents (Cowen and Glazer (1996), Dubey and Haimanko (2003), Dubey and Wu ( 2001)). Theoretical predictions were derived and experimental evidence collected for the case of two competing agents, with the bonus awarded to that agent who outperforms the other. Levels of uncertainty (sampling occasions of productions, 1 or 3), cost of production (high or low), cost symmetry (asymmetric or symmetric), and piece-rate reward were manipulated factorially to test the robustness of the effects of uncertainty. For control, a single-agent case was also theoretically analyzed and empirically tested. The results indicate that, for tournaments, greater uncertainty does indeed lead to greater than expected effort and lower unit variable costs.

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Bibliographic Info

Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2007-093.

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Date of creation: 21 Nov 2007
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Handle: RePEc:jrp:jrpwrp:2007-093

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Related research

Keywords: Monitoring; Tournament; Incentives; Uncertainty; Stochastic Production Technology;

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Cited by:
  1. Yaakov Kareev & Judith Avrahami, 2007. "Distribution of Resources in a Competitive Environment," Levine's Bibliography 122247000000001610, UCLA Department of Economics.
  2. Judith Avrahami & Yaakov Kareev, 2007. "Distribution of Resources in a Competitive Environment," Discussion Paper Series dp465, The Center for the Study of Rationality, Hebrew University, Jerusalem.

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