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

This paper experimentally tests the predictions of a principal-agent model in which the agent has biased beliefs about his ability. Overcon dent workers are found to earn lower wages than undercon dent ones because they overestimate their expected payo , and principals adjust their o ers accordingly. Moreover, the pro t-maximizing contract distorts e ort by varying incentives according to self-con dence, although only the most successful principals use this strategy. These ndings have implications for the labor market; in particular, self-con dence is often correlated with gender, implying that principals would prefer to hire men over women simply because they are more overcon dent.

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Paper provided by Brown University, Department of Economics in its series Working Papers with number 2011-10.

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Date of creation: 2011
Date of revision:
Handle: RePEc:bro:econwp:2011-10
Contact details of provider: Postal: Department of Economics, Brown University, Providence, RI 02912

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  1. Tobias Adrian & Mark M. Westerfield, 2009. "Disagreement and Learning in a Dynamic Contracting Model," Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3873-3906, October.
  2. Fang, Hanming & Moscarini, Giuseppe, 2005. "Morale hazard," Journal of Monetary Economics, Elsevier, vol. 52(4), pages 749-777, May.
  3. Kfir Eliaz & Rani Spiegler, 2005. "A Mechanism-Design Approach to Speculative Trade," Levine's Bibliography 784828000000000429, UCLA Department of Economics.
  4. Santos-Pinto, Luís, 2003. "Positive self-image and incentives in organizations," MPRA Paper 3141, University Library of Munich, Germany, revised 14 Feb 2007.
  5. Eliaz, Kfir & Spiegler, Ran, 2009. "Bargaining over bets," Games and Economic Behavior, Elsevier, vol. 66(1), pages 78-97, May.
  6. Muriel Niederle & Lise Vesterlund, 2005. "Do Women Shy Away from Competition? Do Men Compete too Much?," Discussion Papers 04-030, Stanford Institute for Economic Policy Research.
  7. Augustin Landier & David Thesmar, 2009. "Financial Contracting with Optimistic Entrepreneurs," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 117-150, January.
  8. Jeremy Clark & Lana Friesen, 2009. "Overconfidence in Forecasts of Own Performance: An Experimental Study," Economic Journal, Royal Economic Society, vol. 119(534), pages 229-251, 01.
  9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  10. Vital Anderhub & Simon Gaechter & Manfred Koenigstein, . "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," IEW - Working Papers 018, Institute for Empirical Research in Economics - University of Zurich.
  11. Leonidas Enrique de la Rosa, 2007. "Overconfidence and Moral Hazard," Economics Working Papers 2007-08, School of Economics and Management, University of Aarhus.
  12. Eliaz, Kfir & Spiegler, Ran, 2008. "Consumer optimism and price discrimination," Theoretical Economics, Econometric Society, vol. 3(4), December.
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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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