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Fairness and Incentives in a Multi-Task Principal-Agent Model

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Author Info
Fehr, Ernst
Schmidt, Klaus M.

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Abstract

This paper reports on a two-task principal-agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece rate contracts. Many principals reward high efforts on both tasks with substantial bonuses. Agents anticipate this and provide high efforts on both tasks. In contrast, almost all agents with a piece rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the self-interest theory but is consistent with theories of fairness.

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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 335.

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Date of creation: Apr 2004
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Handle: RePEc:lmu:muenec:335

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Related research
Keywords: Incentives Moral Hazard Multiple Tasks Fairness Experiments

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Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
C9 - Mathematical and Quantitative Methods - - Design of Experiments
J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February. [Downloadable!] (restricted)
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  2. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March. [Downloadable!] (restricted)
    Other versions:
  3. Keser, Claudia & Willinger, Marc, 2000. "Principals' principles when agents' actions are hidden," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 163-185, January. [Downloadable!] (restricted)
  4. Hellwig, Martin F. & Schmidt, Klaus M., 2001. "Discrete-Time Approximations of the Holmström-Milgrom Brownian-Motion Model of Intertemporal Incentive Provision," Discussion Papers in Economics 22, University of Munich, Department of Economics. [Downloadable!]
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  5. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 2001. "Reciprocity as a Contract Enforcement Device," Levine's Working Paper Archive 563824000000000143, UCLA Department of Economics. [Downloadable!]
  6. W. Bentley MacLeod & Daniel Parent, 1998. "Job Characteristics, Wages and the Employment Contract," CIRANO Working Papers 98s-37, CIRANO. [Downloadable!]
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  7. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May. [Downloadable!] (restricted)
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  8. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series 1042, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  9. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1125-56, November. [Downloadable!] (restricted)
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  10. Fehr, Ernst & Kirchsteiger, George & Riedl, Arno, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 437-59, May. [Downloadable!] (restricted)
  11. David K. Levine, 1998. "Modeling Altruism and Spitefulness in Experiment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 593-622, July. [Downloadable!] (restricted)
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  12. Werner Güth & Wolfgang Klose & Manfred Königstein & Joachim Schwalbach, 1998. "An experimental study of a dynamic principal-agent relationship," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 327-341.
  13. Martin Brown & Armin Falk & Ernst Fehr, 2004. "Relational Contracts and the Nature of Market Interactions," Econometrica, Econometric Society, vol. 72(3), pages 747-780, 05. [Downloadable!] (restricted)
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  14. Werner Güth & Manfred Königstein & Judit Kovács & Enikõ Zala-Mezõ, 2001. "Fairness Within Firms: The Case Of One Principal And Multiple Agents," Schmalenbach Business Review (sbr), Wolfgang Ballwieser, Managing editor of sbr, LMU Munich School of Management, University of Munich, Ludwigstr. 28/RG, D-80539 Munich, Germany, vol. 53(2), pages 82-101, April. [Downloadable!]
  15. Fehr, Ernst & Klein, Alexander & Schmidt, Klaus M., 2004. "Contracts, Fairness, and Incentives," Discussion Papers in Economics 334, University of Munich, Department of Economics. [Downloadable!]
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  16. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March. [Downloadable!] (restricted)
  17. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March. [Downloadable!] (restricted)
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  18. Charles Brown, 1990. "Firms' Choice of Method of Pay," NBER Working Papers 3065, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer, vol. 5(1), pages 5-27, June. [Downloadable!] (restricted)
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  20. Berg Joyce & Dickhaut John & McCabe Kevin, 1995. "Trust, Reciprocity, and Social History," Games and Economic Behavior, Elsevier, vol. 10(1), pages 122-142, July. [Downloadable!] (restricted)
  21. Gachter, Simon & Falk, Armin, 2002. " Reputation and Reciprocity: Consequences for the Labour Relation," Scandinavian Journal of Economics, Blackwell Publishing, vol. 104(1), pages 1-26. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Brian Roe & Steven Y. Wu, 2005. "Social Preferences and Relational Contracting Performance: An Experimental Investigation," Microeconomics 0509006, EconWPA. [Downloadable!]
  2. Hessel Oosterbeek & Randolph Sloof & Joep Sonnemans, 2006. "Rent-seeking versus Productive Activities in a Multi-task Experiment," Tinbergen Institute Discussion Papers 06-083/1, Tinbergen Institute. [Downloadable!]
  3. Jana Vyrastekova & Sander Onderstal & Pierre Koning, 2006. "Team incentives in public organisations; an experimental study," CPB Discussion Papers 60, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  4. Ernst Fehr & Klaus M. Schmidt, 2007. "Adding a Stick to the Carrot? The Interaction of Bonuses and Fines," Discussion Papers 197, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  5. Jaag, Christian, 2006. "Teacher Incentives," MPRA Paper 340, University Library of Munich, Germany. [Downloadable!]
  6. Matthias Sutter & Stefan Haigner & Martin Kocher, . "Choosing the carrot or the stick? – Endogenous institutional choice in social dilemma situations," Working Papers 2008-07, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
  7. Avner Shaked, 2006. "On the Explanatory Value of Inequity Aversion Theory," Discussion Papers 164, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  8. Antoni Cunyat & Randolph Sloof, 2008. "Employee Types and Endogenous Organizational Design," Tinbergen Institute Discussion Papers 08-019/1, Tinbergen Institute. [Downloadable!]
  9. Maria Daskalakis & Martina Kauffeld-Monz, 2007. "On the dynamics of knowledge generation and trust building in regional innovation networks. A multi method approach," papers on agent-based economics 4, University of Kassel, Institute of Economics. [Downloadable!]
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