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Contracts for Agents with Biased Beliefs: Some Theory and an Experiment

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  • Anja Sautmann

Abstract

This paper experimentally tests the predictions of a principal-agent model in which the agent has biased beliefs about his ability. Overconfident workers are found to earn lower wages than underconfident ones because they overestimate their expected payoff, and principals adjust their offers accordingly. Moreover, the profit-maximizing contract distorts effort by varying incentives according to self-confidence, although only the most successful principals use this strategy. These findings have implications for the labor market; in particular, self-confidence is often correlated with gender, implying that principals would prefer to hire men over women simply because they are more overconfident.

Suggested Citation

  • Anja Sautmann, 2013. "Contracts for Agents with Biased Beliefs: Some Theory and an Experiment," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 124-156, August.
    • Handle: RePEc:aea:aejmic:v:5:y:2013:i:3:p:124-56
    DOI: 10.1257/mic.5.3.124
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    Citations

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    Cited by:

    1. Justin Downs, 2021. "Information gathering by overconfident agents," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(3), pages 554-568, August.
    2. Adrian Bruhin & Fidel Petros & Luís Santos-Pinto, 2024. "The role of self-confidence in teamwork: experimental evidence," Experimental Economics, Springer;Economic Science Association, vol. 27(3), pages 687-712, July.
    3. Valeria Maggian & Antonio Nicolò, 2016. "The wrong man for the job: biased beliefs and job mismatching," Post-Print halshs-01324733, HAL.
    4. Matthias Fahn & Nicolas Klein, 2023. "Non-Common Priors, Incentives, and Promotions: The Role of Learning," CESifo Working Paper Series 10481, CESifo.
    5. Jen-Wen Chang & Simpson Zhang, 2018. "Competitive Pay and Excessive Manager Risk-taking," Working Papers 18-02, Office of Financial Research, US Department of the Treasury.
    6. Marchegiani, Lucia & Reggiani, Tommaso & Rizzolli, Matteo, 2016. "Loss averse agents and lenient supervisors in performance appraisal," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 183-197.
    7. Raphael Guber & Martin G. Kocher & Joachim Winter, 2021. "Does having insurance change individuals' self‐confidence?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(2), pages 429-442, June.
    8. Víctor González‐Jiménez, 2024. "Incentive contracts when agents distort probabilities," Quantitative Economics, Econometric Society, vol. 15(3), pages 607-653, July.
    9. Thoma, Carmen, 2013. "Is Underconfidence Favored over Overconfidence? An Experiment on the Perception of a Biased Self-Assessment," Discussion Papers in Economics 17460, University of Munich, Department of Economics.
    10. Wenner, Lukas M., 2018. "Do sellers exploit biased beliefs of buyers? An experiment," Games and Economic Behavior, Elsevier, vol. 110(C), pages 194-215.
    11. Englmaier, Florian & Schüßler, Katharina, 2015. "Complementarities of HRM Practices," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 503, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    12. Florian Englmaier & Katharina Schüßler, 2015. "Complementarities of HRM Practices - A Case for Employing Multiple Methods and Integrating Multiple Fields," CESifo Working Paper Series 5249, CESifo.
    13. Chen, Si & Schildberg-Hörisch, Hannah, 2018. "Looking at the bright side: The motivation value of overconfidence," DICE Discussion Papers 291, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    14. Carmen Thoma, 2016. "Under- versus overconfidence: an experiment on how others perceive a biased self-assessment," Experimental Economics, Springer;Economic Science Association, vol. 19(1), pages 218-239, March.
    15. Chen, Si & Schildberg-Hörisch, Hannah, 2019. "Looking at the bright side: The motivational value of confidence," European Economic Review, Elsevier, vol. 120(C).
    16. Santos-Pinto, Luís & Sekeris, Petros G., 2025. "How confidence heterogeneity shapes effort and performance in tournaments and contests," Journal of Mathematical Economics, Elsevier, vol. 116(C).
    17. Michael K. Lim & Ho-Yin Mak & Ying Rong, 2015. "Toward Mass Adoption of Electric Vehicles: Impact of the Range and Resale Anxieties," Manufacturing & Service Operations Management, INFORMS, vol. 17(1), pages 101-119, February.
    18. Downs, Justin, 2024. "Screening, overconfidence, and competition’s effect on market efficiency," Journal of Economic Behavior & Organization, Elsevier, vol. 226(C).
    19. Brown, Jason L. & Farrington, Sukari & Sprinkle, Geoffrey B., 2016. "Biased self-assessments, feedback, and employees' compensation plan choices," Accounting, Organizations and Society, Elsevier, vol. 54(C), pages 45-59.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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    1. Contracts for Agents with Biased Beliefs: Some Theory and an Experiment (AEJ:MI 2013) in ReplicationWiki

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