The Monotonicity Puzzle. An Experimental Investigation of Incentives Structures
Nonï¿½monotone incentive structures, which ï¿½ according to theory ï¿½ are able to induce optimal behavior, are often regarded as empirically less relevant for labor relationships. Scientific attention is (therefore) confined to monotone if not linear contracts. This paper reports on experimental tests comparing nonï¿½monotone vs. monotone contracts in a simple dynamic agency model. The results demonstrate that selecting the nonï¿½monotone contract over of the monotone one is not only optimal from a theoretical point of view, but also remains preferable given the agentsï¿½ observed behavior. However, roughly 50 per cent of the principals prefer the monotone contract.
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