In this paper we utilize optimal contracts in a Lazear-Rosen tournament to experimentally examine how the selection of an incentive mechanism by managers and, likewise, the self-selection into a mechanism by employees, a§ect employee output. Depending on the treatment, those assigned the role of a principal or an agent could choose between two theoretically equivalent tournaments: a reward tour...

This paper is the first to systematically document the relationship between individual teacher performance incentives and student achievement using the United States data. We combine data from the National Education Longitudinal Survey on schools, students, and their families with our own survey conducted in 2000 regarding the use of teacher incentives. This survey on teacher incentives has uni...

In this paper, a principal’s decision between delegating two tasks or handling one of the two tasks herself is analyzed. We assume that the principal uses both, formal contracts and informal agreements sustained by the value of future relationships (relational contracts) as incentive device. It is found that the principal is less likely to delegate both tasks in a dynamic setting than in a stat...

Promotions and Incentives: The Case of Multi-Stage Elimination Tournaments Promotion tournaments play an important role for the provision of incentives in firms. In this paper, we extend research on single-stage rank-order tournaments and analyze behavior in multi-stage elimination tournaments. The main treatment of our laboratory experiment is a two-stage tournament in which equilibrium effort...

I consider a repeated principal-agent setting in which the agent repeatedly chooses between hidden “long-term” and “short-term” actions. Relative to the long-term action, the short-term action boosts output today but hurts output tomorrow. The optimal contract inducing long-term actions provides a fresh perspective on upward sloping pay scales, severance pay and high-watermark contracts. The my...

The presence of workers who reciprocate higher wages with greater effort can have important consequences for labor markets. Knowledge about the determinants of reciprocal effort choices is, however, incomplete. We investigate the role of fairness perceptions and social preferences in workers’ performance in a field experiment in which workers were hired for a one-time job. We show that workers ...

Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges This paper provides evidence on how executive compensation relates to firm performance in listed firms in China. Using comprehensive financial and accounting data on China’s listed firms from 1998 to 2002, augmented by unique data on executive comp...

Sorting, Incentives and Risk Preferences: Evidence from a Field Experiment The, often observed, positive correlation between incentive intensity and risk has been explained in two ways: the presence of transaction costs as determinants of contracts and the sorting of risk-tolerant individuals into firms using high-intensity incentive contracts. The empirical importance of sorting is perhaps bes...

This paper identifies a new cost of pay-for-performance incentives when principal and agent may disagree on the optimal course of action. In particular, pay-for-performance gives the agent a reason to disobey the principal, and thus act against his principal’s interests, when the two of them disagree. In other words, high-powered incentives may decrease the agent’s ‘zone of acceptance’ (Simon 1...

The Peter Principle: An Experiment The Peter Principle states that, after a promotion, the observed output of promoted employees tends to fall. Lazear (2004) models this principle as resulting from a regression to the mean of the transitory component of ability. Our experiment reproduces this model in the laboratory by means of various treatments in which we alter the variance of the transitory...