DP4464 Fairness and Incentives in a Multi-Task Principle-Agent Model

Author(s): Ernst Fehr, Klaus M. Schmidt
Publication Date: June 2004
Keyword(s): experiments, fairness, incentives, moral hazard, multiple tasks
JEL(s): C70, C90, J30
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4464

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 behaviour contradicts the self-interest theory but is consistent with theories of fairness.