Fairness and Incentives in a Multi-Task Principal-Agent Model

Fehr, Ernst and Schmidt, Klaus M. (April 2004): Fairness and Incentives in a Multi-Task Principal-Agent Model. Discussion Papers in Economics 2004-8

Abstract

This paper reports on a two-task principal-agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece rate contracts. Many principals reward high efforts on both tasks with substantial bonuses. Agents anticipate this and provide high efforts on both tasks. In contrast, almost all agents with a piece rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the self-interest theory but is consistent with theories of fairness.

• Item Type: Paper (Discussion Paper)
• Published in: Scandinavian Journal of Economics, No. 3, Vol. 106, 2004: pp. 453-474.
• Keywords: Incentives; Moral Hazard; Multiple Tasks; Fairness; Experiments
• Subjects: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > Micro-Economics; Economics > Discussion Papers in Economics > Labor; Economics > Discussion Papers in Economics > Economics of Information; Economics > Discussion Papers in Economics > Behavioral Economics; Economics > Discussion Papers in Economics > Game Theory
• Dewey Classification: 300 Social sciences; 300 Social sciences > 330 Wirtschaft
• Journal of Economic Literature classification: C7, C9, J3
• Language: English