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Incentive Complexity, Bounded Rationality, and Effort Provision

Author

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  • Johannes Abeler
  • David Huffman
  • Collin Raymond

Abstract

Using field and laboratory experiments, we demonstrate that the complexity of incentive schemes and worker bounded rationality can affect effort provision. This is because some attributes of the incentives become opaque; that is, workers do not take them into account. In our setting, workers overprovide effort relative to a fully rational benchmark, improving efficiency. We identify contract features, and facets of worker cognitive ability, that matter for opacity. We find that even relatively small degrees of opacity can cause large shifts in behavior. Our results illustrate important implications of complexity and bounded rationality for designing and regulating workplace incentive contracts.

Suggested Citation

  • Johannes Abeler & David Huffman & Collin Raymond, 2025. "Incentive Complexity, Bounded Rationality, and Effort Provision," American Economic Review, American Economic Association, vol. 115(12), pages 4404-4437, December.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:12:p:4404-37
    DOI: 10.1257/aer.20230751
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    More about this item

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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