Incentive Effects of Funding Contracts: An Experiment
We examine the incentive effects of funding contracts on entrepreneurial effort decisions and allocative efficiency. We experiment with funding contracts that differ in the structure of investor repayment and, therefore, in the incentives for entrepreneurial effort provision. Theoretically the replacement of a standard debt contract by a repayment-equivalent non-monotonic contract reduces effort distortions and increases efficiency. Likewise the replacement of outside equity by a repayment-equivalent standard-debt contract mitigates distortions. We test both hypotheses in the laboratory. Our results reveal that the incentive effects of funding contracts need to be experienced before they reflect in observed behavior. With sufficient experience observed behavior is consistent with the theoretical predictions and supports both hypotheses. If we allow for entrepreneur-sided manipulations of the project outcome we find that non-monotonic contracts lose its appeal.
|Date of creation:||30 Sep 2012|
|Contact details of provider:|| Postal: D-78457 Konstanz|
Web page: https://www.wiwi.uni-konstanz.de/en
More information through EDIRC
|Order Information:||Web: https://www.wiwi.uni-konstanz.de/en|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993.
"Does Fairness Prevent Market Clearing? An Experimental Investigation,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 108(2), pages 437-459.
- Georg Kirchsteiger & Ernst Fehr & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," ULB Institutional Repository 2013/5927, ULB -- Universite Libre de Bruxelles.
- Daniel T. Knoepfle & Joseph Tao-yi Wang & Colin F. Camerer, 2009. "Studying Learning in Games Using Eye-Tracking," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 388-398, 04-05.
- Urs Fischbacher & Franziska Föllmi-Heusi, 2013.
"Lies In Disguise—An Experimental Study On Cheating,"
Journal of the European Economic Association,
European Economic Association, vol. 11(3), pages 525-547, 06.
- Urs Fischbacher & Franziska Heusi, 2008. "Lies in Disguise. An experimental study on cheating," TWI Research Paper Series 40, Thurgauer Wirtschaftsinstitut, Universitï¿½t Konstanz.
- Aghion, P. & Howitt, P., 1990.
"A Model Of Growth Through Creative Destruction,"
DELTA Working Papers
90-12, DELTA (Ecole normale supérieure).
- Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
- Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
- Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
- Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
- Ulrike Malmendier & Geoffrey Tate, 2005.
"CEO Overconfidence and Corporate Investment,"
Journal of Finance,
American Finance Association, vol. 60(6), pages 2661-2700, December.
- J. Philipp Reiß & Irenaeus Wolff, 2012.
"Incentive Effects of Funding Contracts: An Experiment,"
Working Paper Series of the Department of Economics, University of Konstanz
2012-26, Department of Economics, University of Konstanz.
- J. Reiß & Irenaeus Wolff, 2014. "Incentive effects of funding contracts: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 17(4), pages 586-614, December.
- J. Philipp Reiss & Irenaeus Wolff, 2011. "Incentive Effects of Funding Contracts: An Experiment," TWI Research Paper Series 70, Thurgauer Wirtschaftsinstitut, Universitï¿½t Konstanz.
- Irenaeus Wolff & J. Philipp Reiss, 2012. "Incentive Effects of Funding Contracts: An Experiment," TWI Research Paper Series 78, Thurgauer Wirtschaftsinstitut, Universitï¿½t Konstanz.
- Tyran, Jean-Robert, 2003. "Behavioral Game Theory. Experiments in Strategic Interaction: Colin F. Camerer, Princeton University Press, Princeton, New Jersey, 2003, p. 550, Price $65.00/[UK pound]42.95, ISBN 0-691-09039-4," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 32(6), pages 717-720, December.
- Fehr, Ernst & Klein, Alexander & Schmidt, Klaus M., 2007.
"Fairness and contract design,"
Munich Reprints in Economics
20618, University of Munich, Department of Economics.
- Fehr, Ernst & Klein, Alexander & Schmidt, Klaus M., 2005. "Fairness and Contract Design," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 67, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
- Brown, Martin & Zehnder, Christian, 2010.
"The emergence of information sharing in credit markets,"
Journal of Financial Intermediation,
Elsevier, vol. 19(2), pages 255-278, April.
- Martin Brown & Christian Zehnder, 2008. "The Emergence of Information Sharing in Credit Markets," Working Papers 2008-01, Swiss National Bank.
- Martin Brown & Christian Zehnder, 2007. "The Emergence of Information Sharing in Credit Markets," IEW - Working Papers 317, Institute for Empirical Research in Economics - University of Zurich.
- Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262025531.
- Edward P. Lazear, 2000.
"Performance Pay and Productivity,"
American Economic Review,
American Economic Association, vol. 90(5), pages 1346-1361, December.
- Jordi Brandts & Gary Charness, 2004. "Do Labour Market Conditions Affect Gift Exchange? Some Experimental Evidence," Economic Journal, Royal Economic Society, vol. 114(497), pages 684-708, 07.
- Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
- Paul Romer, 1989.
"Endogenous Technological Change,"
NBER Working Papers
3210, National Bureau of Economic Research, Inc.
- Irlenbusch, Bernd & Sliwka, Dirk, 2005. "Transparency and reciprocal behavior in employment relations," Journal of Economic Behavior & Organization, Elsevier, vol. 56(3), pages 383-403, March.
- Martin Brown & Christian Zehnder, 2005. "Credit Registries, Relationship Banking and Loan Repayment," IEW - Working Papers 240, Institute for Empirical Research in Economics - University of Zurich.
- Paul R. Milgrom, 1981.
"Good News and Bad News: Representation Theorems and Applications,"
Bell Journal of Economics,
The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
- Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Kirchkamp Oliver & Reiss J. Philipp & Sadrieh Abdolkarim, 2006.
"A pure variation of risk in first-price auctions,"
058, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
- DeJong, Douglas V & Forsythe, Robert & Lundholm, Russell J, 1985. " Ripoffs, Lemons, and Reputation Formation in Agency Relationships: A Laboratory Market Study," Journal of Finance, American Finance Association, vol. 40(3), pages 809-820, July.
- Ben Greiner, 2004. "The Online Recruitment System ORSEE 2.0 - A Guide for the Organization of Experiments in Economics," Working Paper Series in Economics 10, University of Cologne, Department of Economics.
- C. Monica Capra, 1999. "Anomalous Behavior in a Traveler's Dilemma?," American Economic Review, American Economic Association, vol. 89(3), pages 678-690, June.
- Ho, Teck H. & Camerer, Colin F. & Chong, Juin-Kuan, 2007. "Self-tuning experience weighted attraction learning in games," Journal of Economic Theory, Elsevier, vol. 133(1), pages 177-198, March.
- Bruce Shearer, 2004. "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 513-534.
When requesting a correction, please mention this item's handle: RePEc:knz:dpteco:1226. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Office Ursprung)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.