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The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures

By Jeannette Brosig, Christian Lukas and Thomas Riechmann

Abstract

Non-monotone incentive structures, which - according to theory - are able to induce optimal behavior, are often regarded as empirically less relevant for labor relationships. We compare the performance of a theoretically optimal non-monotone contract with a monotone one under controlled laboratory conditions. Implementing some features relevant to real-world employment relationships, our paper demonstrates that, in fact, the frequency of income-maximizing decisions made by agents is higher under the monotone contract. Although this observed behavior does not change the superiority of the non-monotone contract for principals, they do not choose this contract type in a significant way. This is what we call the monotonicity puzzle. Detailed investigations of decisions provide a clue for solving the puzzle and a possible explanation for the popularity of monotone contracts

Topics: experimental agency, non-monotone contracts, Business, HF5001-6182, Commerce, HF1-6182, Social Sciences, H, DOAJ:Business and Management, DOAJ:Business and Economics
Publisher: Springer
Year: 2010
OAI identifier: oai:doaj.org/article:1704fcc3274f47b3a507a70cda1538e6
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