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Monitoring and Pay: An Experiment on Contract Design with Endogenous Monitoring

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  • Dittrich, Dennis A. V.
  • Kocher, Martin G.

Abstract

We implement a laboratory experiment in which a principal has to decide on monitoring intensity and pay to investigate whether they are complements or substitutes. Wage level, monitoring intensity, and consequently the desired enforceable effort level are jointly determined by the maximization problem of the firm. As a result, theoretically monitoring and pay should be complements. The between-treatment variation in our experiment is qualitatively in line with the normative prediction of the model under standard assumptions. Also the subject-specific variation indicates that monitoring and pay are considered as complements. Yet, we also find evidence for reciprocal behavior. Our data analysis shows, however, that it does not pay for the principal to only rely on the reciprocity of his agents.

Suggested Citation

  • Dittrich, Dennis A. V. & Kocher, Martin G., 2014. "Monitoring and Pay: An Experiment on Contract Design with Endogenous Monitoring," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100580, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc14:100580
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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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