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Fairness and incentives in a multi-task principal-agent model

Author

Listed:
  • Fehr, Ernst
  • Schmidt, Klaus M.

Abstract

This paper reports on a two-task principal agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece-rate contracts. Many principals reward high effort on both tasks with substantial bonuses. Agents anticipate this and provide high effort on both tasks, in contrast, almost all agents with a piece-rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the self-interest theory but is consistent with theories of fairness.

Suggested Citation

  • Fehr, Ernst & Schmidt, Klaus M., 2004. "Fairness and incentives in a multi-task principal-agent model," Munich Reprints in Economics 20657, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenar:20657
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    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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