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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. Overconfi dent workers are found to earn lower wages than underconfi dent ones because they overestimate their expected payoff , and principals adjust their off ers accordingly. Moreover, the profi t-maximizing contract distorts e ffort by varying incentives according to self-con fidence, although only the most successful principals use this strategy. These fi ndings have implications for the labor market; in particular, self-con fidence is often correlated with gender, implying that principals would prefer to hire men over women simply because they are more overconfi dent.

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
    Note: DOI: 10.1257/mic.5.3.124
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    References listed on IDEAS

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    Cited by:

    1. Lucia Marchegiani & Tommaso Reggiani & Matteo Rizzolli, 2013. "Severity vs. Leniency Bias in Performance Appraisal: Experimental evidence," BEMPS - Bozen Economics & Management Paper Series BEMPS01, Faculty of Economics and Management at the Free University of Bozen.
    2. 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.
    3. 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 Group Munich.
    4. Chen, Si & Schildberg-Hörisch, Hannah, 2018. "Looking at the Bright Side: The Motivation Value of Overconfidence," IZA Discussion Papers 11564, Institute for the Study of Labor (IZA).
    5. Valeria Maggian & Antonio Nicolò, 2016. "The wrong man for the job: biased beliefs and job mismatching," Post-Print halshs-01324733, HAL.
    6. Ian Larkin & Stephen Leider, 2012. "Incentive Schemes, Sorting, and Behavioral Biases of Employees: Experimental Evidence," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 184-214, May.
    7. 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.
    8. Chen, Si & Schildberg-Hörisch, Hannah, 2018. "Looking at the bright side: The motivation value of overconfidence," DICE Discussion Papers 291, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    9. 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.
    10. 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.
    11. 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.
    12. 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.

    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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