Incentive Effects of Funding Contracts: An Experiment
AbstractWe examine the incentive effects of funding contracts on entrepreneurial effort decisions and allocative efficiency. We experiment with funding contracts that differ in the structure of investor repayment and, therefore, in the incentives for entrepreneurial effort provision. Theoretically the replacement of a standard debt contract by a repayment-equivalent non-monotonic contract reduces effort distortions and increases efficiency. Likewise the replacement of outside equity by a repayment-equivalent standard-debt contract mitigates distortions. We test both hypotheses in the laboratory. Our results reveal that the incentive effects of funding contracts need to be experienced before they reflect in observed behavior. With sufficient experience observed behavior is consistent with the theoretical predictions and supports both hypotheses. If we allow for entrepreneur-sided manipulations of the project outcome we find that non-monotonic contracts lose its appeal.
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Bibliographic InfoPaper provided by Department of Economics, University of Konstanz in its series Working Paper Series of the Department of Economics, University of Konstanz with number 2012-26.
Length: 41 pages
Date of creation: 30 Sep 2012
Date of revision:
Other versions of this item:
- Irenaeus Wolff & J. Philipp Reiss, 2012. "Incentive Effects of Funding Contracts: An Experiment," TWI Research Paper Series 78, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
- J. Philipp Reiss & Irenaeus Wolff, 2011. "Incentive Effects of Funding Contracts: An Experiment," TWI Research Paper Series 70, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-06 (All new papers)
- NEP-CBE-2012-12-06 (Cognitive & Behavioural Economics)
- NEP-CTA-2012-12-06 (Contract Theory & Applications)
- NEP-EXP-2012-12-06 (Experimental Economics)
- NEP-HRM-2012-12-06 (Human Capital & Human Resource Management)
- NEP-PPM-2012-12-06 (Project, Program & Portfolio Management)
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