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An experimental study of incentive contracts for short- and long-term employees

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  • Chi, Wei
  • Liu, Tracy Xiao
  • Qian, Xiaoye
  • Ye, Qing

Abstract

Motivated by real-world observations of different contract offers, we conduct a lab experiment to examine a principal's contract choice and agent effort in both long- and short-term employment relationships, implemented as one-shot and repeated games. We find that a piece-rate contract has the strongest incentive effect on short-term agents’ effort and is the principals’ dominant choice. Nevertheless, the bonus contract works almost as well as the piece-rate contract for long-term relationships, but not so well for short-term relationships. In addition, the bonus contract's effect on effort is mainly driven by the bonus component, suggesting that a fixed wage alone is not an effective mechanism to improve workers’ performance.

Suggested Citation

  • Chi, Wei & Liu, Tracy Xiao & Qian, Xiaoye & Ye, Qing, 2019. "An experimental study of incentive contracts for short- and long-term employees," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 366-383.
  • Handle: RePEc:eee:jeborg:v:159:y:2019:i:c:p:366-383
    DOI: 10.1016/j.jebo.2019.02.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Incentive contract; Repeated game; Experiment;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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