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Gaming and Strategic Ambiguity in Incentive Provision

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  • Margaret Meyer
  • Florian Ederer
  • Richard Holden

Abstract

It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming.� We formally investigate these arguments.� Ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and is better informed about the environment, but also impose more risk on the agent.� If tasks are sufficiently complementary for the principal, ambiguous schemes can dominate the best deterministic scheme and can completely eliminate the efficiency losses from the agent's better knowledge of the environment.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 640.

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Date of creation: 17 Jan 2013
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Handle: RePEc:oxf:wpaper:640

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Keywords: Contracts; incentives; gaming; strategic ambiguity; randomization;

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  1. Raj Chetty & Adam Looney & Kory Kroft, 2009. "Salience and Taxation: Theory and Evidence," American Economic Review, American Economic Association, vol. 99(4), pages 1145-77, September.
  2. Sandeep Baliga & Tomas Sjöström, 2008. "Strategic Ambiguity and Arms Proliferation," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1023-1057, December.
  3. David Rahman, 2012. "But Who Will Monitor the Monitor?," American Economic Review, American Economic Association, vol. 102(6), pages 2767-97, October.
  4. Andrew Healy & Jennifer Pate, 2011. "Can Teams Help to Close the Gender Competition Gap?," Economic Journal, Royal Economic Society, vol. 121(555), pages 1192-1204, 09.
  5. Englmaier, Florian & Roider, Andreas & Sunde, Uwe, 2012. "The Role of Salience in Performance Schemes: Evidence from a Field Experiment," CEPR Discussion Papers 8921, C.E.P.R. Discussion Papers.
  6. Simon Burgess & Carol Propper & Marisa Ratto & Emma Tominey, 2004. "Incentives in the Public Sector: Evidence from a Government Agency," The Centre for Market and Public Organisation 04/103, Department of Economics, University of Bristol, UK.
  7. Scott E. Carrell & James E. West, 2008. "Does Professor Quality Matter? Evidence from Random Assignment of Students to Professors," NBER Working Papers 14081, National Bureau of Economic Research, Inc.
  8. Baker, George P, 1992. "Incentive Contracts and Performance Measurement," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 598-614, June.
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Cited by:
  1. David Rahman, 2012. "But Who Will Monitor the Monitor?," American Economic Review, American Economic Association, vol. 102(6), pages 2767-97, October.

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