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"Yes men", integrity, and the optimal design of incentive contracts

  • Ewerhart, Christian
  • Schmitz, Patrick W.

In a pioneering approach towards the explanation of the phenomenon of "yes man" behavior in organizations, Prendergast (1993) argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off between inducing a worker to exert costly effort and inducing him to tell the truth. In contrast, we show that with optimally designed contracts, which we term integrity contracts, the worker will both exert effort and report his information truthfully, and that hence the first best can be achieved.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 43 (2000)
Issue (Month): 1 (September)
Pages: 115-125

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Handle: RePEc:eee:jeborg:v:43:y:2000:i:1:p:115-125
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. Nöldeke, Georg & Schmidt, Klaus M., 1995. "Option contracts and renegotiation: A solution to the Hold-Up Problem," Munich Reprints in Economics 19329, University of Munich, Department of Economics.
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  12. Hermalin, Benjamin E & Katz, Michael L, 1993. "Judicial Modification of Contracts between Sophisticated Parties: A More Complete View of Incomplete Contracts and Their Breach," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 230-55, October.
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