Advanced Search
MyIDEAS: Login to save this paper or follow this series

Adding a Stick to the Carrot? The Interaction of Bonuses and Fines

Contents:

Author Info

  • Fehr, Ernst
  • Schmidt, Klaus M.

Abstract

In this paper we report on a principal-agent experiment where the principal can choose whether to rely on an unenforcable bonus contract or to combine the bonus contract with a fine if the agent’s effort falls below a minimum standard. We show that most principals do not use the fine and that the pure bonus contract is more efficient than the combined contract. Our experiment suggests that principals who are less fair are more likely to choose a combined contract and less likely to actually pay the announced bonus. This offers a new explanation for why explicit and implicit incentives are substitutes rather than complements.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://epub.ub.uni-muenchen.de/13355/1/197.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 197.

as in new window
Length:
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:trf:wpaper:197

Contact details of provider:
Postal: Geschwister-Scholl-Platz 1, D-80539 Munich, Germany
Phone: +49-(0)89-2180-3405
Fax: +49-(0)89-2180-3510
Web page: http://www.sfbtr15.de/
More information through EDIRC

Related research

Keywords: moral hazard; bonus contract; implicit incentives; fairness; incentives;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Ernst Fehr & Klaus M. Schmidt, . "Fairness and Incentives in a Multi-Task Principal-Agent Model," IEW - Working Papers 191, Institute for Empirical Research in Economics - University of Zurich.
  2. Gneezy, Uri & Rustichini, Aldo, 2000. "A Fine is a Price," The Journal of Legal Studies, University of Chicago Press, University of Chicago Press, vol. 29(1), pages 1-17, January.
  3. Ernst Fehr & John List, 2004. "The hidden costs and returns of incentives - trust and trustworthiness among ceos," Artefactual Field Experiments, The Field Experiments Website 00044, The Field Experiments Website.
  4. Benabou, Roland & Tirole, Jean, 2005. "Incentives and Prosocial Behavior," IZA Discussion Papers 1695, Institute for the Study of Labor (IZA).
  5. Frey, Bruno S & Jegen, Reto, 2001. " Motivation Crowding Theory," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 15(5), pages 589-611, December.
  6. Armin Falk & Michael Kosfeld, . "The Hidden Costs of Control," IEW - Working Papers 250, Institute for Empirical Research in Economics - University of Zurich.
  7. Gneezy, U. & Rustichini, A., 1998. "Pay Enough - Or Don't Pay at All," Discussion Paper, Tilburg University, Center for Economic Research 1998-57, Tilburg University, Center for Economic Research.
  8. Ernst Fehr & Alexander Klein & Klaus M Schmidt, 2007. "Fairness and Contract Design," Econometrica, Econometric Society, Econometric Society, vol. 75(1), pages 121-154, 01.
  9. Dirk Sliwka, 2007. "Trust as a Signal of a Social Norm and the Hidden Costs of Incentive Schemes," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 999-1012, June.
  10. Ernst Fehr & Bettina Rockenbach, 2003. "Detrimental effects of sanctions on human altruism," Microeconomics, EconWPA 0305007, EconWPA.
  11. Roland Bénabou & Jean Tirole, 2003. "Intrinsic and Extrinsic Motivation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 489-520.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Oosterbeek, Hessel & Sloof, Randolph & Sonnemans, Joep, 2011. "Rent-seeking versus productive activities in a multi-task experiment," European Economic Review, Elsevier, Elsevier, vol. 55(5), pages 630-643, June.
  2. Daniel Houser & Erte Xiao & Kevin McCabe & Vernon Smith, 2005. "When punishment fails: Research on sanctions, intentions and non- cooperation," Experimental, EconWPA 0503001, EconWPA.
  3. Maria Bigoni & Giancarlo Spagnolo & Paola Valbonesi, 2010. "Sticks and Carrots in Procurement," CEIS Research Paper, Tor Vergata University, CEIS 157, Tor Vergata University, CEIS, revised 28 May 2010.
  4. Cunyat, Antoni & Sloof, Randolph, 2011. "Employee types and endogenous organizational design: An experiment," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 80(3), pages 553-573.
  5. Tetlock, Philip E. & Vieider, Ferdinand M. & Patil, Shefali V. & Grant, Adam M., 2013. "Accountability and ideology: When left looks right and right looks left," Organizational Behavior and Human Decision Processes, Elsevier, Elsevier, vol. 122(1), pages 22-35.
  6. Golman, Russell & Bhatia, Sudeep, 2012. "Performance evaluation inflation and compression," Accounting, Organizations and Society, Elsevier, vol. 37(8), pages 534-543.
  7. Herold, Florian, 2010. "Contractual incompleteness as a signal of trust," Games and Economic Behavior, Elsevier, Elsevier, vol. 68(1), pages 180-191, January.
  8. Sääksvuori, Lauri, 2013. "Voluntary formation of centralized sanctioning institutions," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 44(C), pages 150-159.
  9. Flynn, Sean Masaki & Donnelly, Michael, 2012. "Does labor contract completeness drive unionization? Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 41(4), pages 445-454.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:trf:wpaper:197. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alexandra Frank).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.