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The Monotonicity Puzzle. An Experimental Investigation of Incentives Structures

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  • Jeannette Brosig
  • Christian Lukas
  • Thomas Riechmann

Abstract

Non–monotone incentive structures, which — according to theory — are able to induce optimal behavior, are often regarded as empirically less relevant for labor relationships. Scientific attention is (therefore) confined to monotone if not linear contracts. This paper reports on experimental tests comparing non–monotone vs. monotone contracts in a simple dynamic agency model. The results demonstrate that selecting the non–monotone contract over of the monotone one is not only optimal from a theoretical point of view, but also remains preferable given the agents’ observed behavior. However, roughly 50 per cent of the principals prefer the monotone contract.

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Paper provided by Thurgauer Wirtschaftsinstitut, Universität Konstanz in its series TWI Research Paper Series with number 15.

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Date of creation: 2006
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Handle: RePEc:twi:respas:0015

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Keywords: experimental agency; non–monotone contracts;

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