On the Incentive Effects of Uncertainty in Monitoring Agents - A Theoretical and Experimental Analysis

24 Pages Posted: 21 Nov 2007

See all articles by Judith Avrahami

Judith Avrahami

affiliation not provided to SSRN

Werner Guth

Max Planck Institute of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Yaakov Kareev

affiliation not provided to SSRN

Tobias Uske

affiliation not provided to SSRN

Date Written: November 21, 2007

Abstract

When two or more agents compete for a bonus and the agents' productivity in each of several possible occurrences depends stochastically on (constant) effort, the number of times that are checked to assign the bonus affects the level of uncertainty in the selection process. Uncertainty, in turn, is expected to increase the efforts made by competing agents (Cowen and Glazer (1996), Dubey and Haimanko (2003), Dubey and Wu (2001)). Theoretical predictions were derived and experimental evidence collected for the case of two competing agents, with the bonus awarded to that agent who outperforms the other. Levels of uncertainty (sampling occasions of productions, 1 or 3), cost of production (high or low), cost symmetry (asymmetric or symmetric), and piece-rate reward were manipulated factorially to test the robustness of the effects of uncertainty. For control, a single-agent case was also theoretically analyzed and empirically tested. The results indicate that, for tournaments, greater uncertainty does indeed lead to greater than expected effort and lower unit variable costs.

Keywords: Monitoring, Tournament, Incentives, Uncertainty, Stochastic Production Technology

JEL Classification: J33, M42, M52, M55

Suggested Citation

Avrahami, Judith and Güth, Werner and Kareev, Yaakov and Uske, Tobias, On the Incentive Effects of Uncertainty in Monitoring Agents - A Theoretical and Experimental Analysis (November 21, 2007). Jena Economic Research Paper No. 2007-093. Available at SSRN: https://ssrn.com/abstract=1031626 or http://dx.doi.org/10.2139/ssrn.1031626

Judith Avrahami

affiliation not provided to SSRN

No Address Available

Werner Güth (Contact Author)

Max Planck Institute of Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Yaakov Kareev

affiliation not provided to SSRN

No Address Available

Tobias Uske

affiliation not provided to SSRN ( email )

No Address Available

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