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http://ssrn.com/abstract=1569688
 
 

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Incentive Schemes, Sorting and Behavioral Biases of Employees: Experimental Evidence


Ian Larkin


University of California, Los Angeles (UCLA) - Anderson School of Management

Stephen Leider


University of Michigan, Stephen M. Ross School of Business

September 9, 2011

Harvard Business School NOM Unit Working Paper No. 10-078

Abstract:     
We investigate how the convexity of a firm’s incentives interacts with worker overconfidence to affect sorting decisions and performance. We demonstrate experimentally that overconfident employees are more likely to sort into a non-linear incentive scheme over a linear one, even though this reduces pay for many subjects and despite the presence of clear feedback. Additionally, the linear scheme attracts demotivated, underconfident workers who perform below their ability. Our findings suggest that firms may design incentive schemes that adapt to the behavioral biases of employees to “sort in” (“sort away”) attractive (unattractive) employees; such schemes may also reduce a firm’s wage bill.

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Date posted: March 14, 2010 ; Last revised: September 9, 2011

Suggested Citation

Larkin, Ian and Leider, Stephen, Incentive Schemes, Sorting and Behavioral Biases of Employees: Experimental Evidence (September 9, 2011). Harvard Business School NOM Unit Working Paper No. 10-078. Available at SSRN: http://ssrn.com/abstract=1569688 or http://dx.doi.org/10.2139/ssrn.1569688

Contact Information

Ian Larkin (Contact Author)
University of California, Los Angeles (UCLA) - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
Stephen Leider
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
HOME PAGE: http://www-personal.umich.edu/~leider/
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