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The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures

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Author(s): Jeannette Brosig | Christian Lukas | Thomas Riechmann

Journal: BuR : Business Research
ISSN 1866-8658

Volume: 3;
Issue: 1;
Start page: 8;
Date: 2010;
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Keywords: experimental agency | non-monotone contracts

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.
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