Conventional wisdom suggests that an increase in monetary incentives should induce agents to exert higher effort. In this paper, however, we demonstrate that this may not hold in team settings. In the context of sequential team production with positive externalities between agents, incentive reversal might occur: an increase in monetary incentives (either because rewards increase or effort cost...

Distorted performance measures in compensation contracts elicit suboptimal behavioral responses that may even prove to be dysfunctional (gaming). This paper applies the empirical test developed by Courty and Marschke (2008) to detect whether the widely used class of Residual Income based performance measures —such as Economic Value Added (EVA)— is distorted, leading to unintended agent behavior...

We find significant relations between active mutual fund portfolio holdings and executive compensation, which appear to be largely driven by mutual fund investment styles rather than monitoring behaviour. Aggressive growth fund holdings are associated with performance pay, while income fund holdings are negatively related. We also find that mutual fund holdings are insensitive to changes in exe...

The practice of executive stock option repricing is examined using a sample of firms in the gaming industry during 1994-98. The practice of repricing executive stock options is often criticized, however this paper recognizes that there may be conditions when such recontracting may be viewed as beneficial to shareholders. Specifically, given that options provide both incentives to increase risk ...

When only group performance is observable, incentives depend on the distribution of payments between group members. This distribution differs between firms. In this paper, we analyze whether the coexistence of various group performance-based payment schemes on the labor market can be related to agents’ heterogeneity. We test by a laboratory experiment whether agents self-select between a compet...

We measure the importance of risk within a firm that pays its workers piece rates, exploiting data from payroll records and a series of field experiments conducted within the firm. These data are used to identify and estimate worker preferences, abilities and risk exposure. These estimates are combined to measure the workers’ cost of risk: their willingness to pay to avoid risky contracts. We f...

Economic Satisfaction and Income Rank in Small Neighbourhoods We contribute to the literature on well-being and comparisons by appealing to new Danish data dividing the country up into around 9,000 small neighbourhoods. Administrative data provides us with the income of every person in each of these neighbourhoods. This income information is matched to demographic and economic satisfaction vari...

This paper reports on the results of an experiment testing whether the agents selfselect between a competitive payment scheme and a revenue-sharing scheme depending on their inequity aversion. Average efficiency should be increased when these payment schemes are endogenously chosen by agents. We show that the choice of the competition is negatively affected by disadvantageous inequity aversion ...

This paper investigates the efficiency of incomplete contracts if the investors have heterogenous preferences implying heterogenous bargaining behavior, and if these preferences are private information. In the hold-up problem, incomplete contracts cause the proceeds of the investments to be shared by bargaining. Fair-minded individuals reject positive but unfair offers even if this causes a bar...

The two major paradigms in the theoretical agency literature are moral hazard (i.e., hidden action) and adverse selection (i.e., hidden information). Prior research typically solves these problems in isolation, as opposed to simultaneously incorporating both adverse selection and moral hazard features. We formulate two complementary generalized principalagent models that incorporate features ob...