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Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay

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Listed author(s):
  • C. Kirabo Jackson
  • Henry S. Schneider

Abstract

Moral hazard is endemic to employment relationships and firms often use performance pay and managerial control to address this problem. While performance pay has received much empirical attention, managerial control has not. We analyze data from a managerial-control field experiment in which an auto-repair firm provided detailed checklists to mechanics and monitored their use. Revenue was 20 percent higher under the experiment. We compare this effect to that of quasi-experimental increases in mechanic commission rates. The managerial-control effect is equivalent to that of a 10 percent commission increase. We find evidence of complementarities between the two, suggesting benefits from an all-of-the-above approach. We also find evidence of incentive gaming under performance pay.

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File URL: http://www.nber.org/papers/w19645.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19645.

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Date of creation: Nov 2013
Handle: RePEc:nbr:nberwo:19645
Note: LS PE
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Find related papers by JEL classification:

  • D0 - Microeconomics - - General
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
  • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
  • H0 - Public Economics - - General
  • J0 - Labor and Demographic Economics - - General
  • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
  • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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  14. C. Kirabo Jackson & Henry S. Schneider, 2011. "Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry," American Economic Journal: Applied Economics, American Economic Association, vol. 3(3), pages 244-267, July.
  15. J. A. Mirrlees, 1999. "The Theory of Moral Hazard and Unobservable Behaviour: Part I," Review of Economic Studies, Oxford University Press, vol. 66(1), pages 3-21.
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  19. Alan B. Krueger, 1991. "Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 75-101.
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