'Yes Men,' Integrity, and the Optimal Design of Incentive Contracts

17 Pages Posted: 25 Nov 2007

See all articles by Christian Ewerhart

Christian Ewerhart

University of Zurich, Department of Economics

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Abstract

In a pioneering approach towards the explanation of the phenomenon of 'yes man' behavior in organizations, Prendergast (1993) argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off between inducing a worker to exert costly effort and inducing him to tell the truth. In contrast, we show that with optimally designed contracts, which we term integrity contracts, the worker will both exert effort and report his information truthfully, and that hence the first best can be achieved.

Suggested Citation

Ewerhart, Christian and Schmitz, Patrick W., 'Yes Men,' Integrity, and the Optimal Design of Incentive Contracts. Available at SSRN: https://ssrn.com/abstract=1032132 or http://dx.doi.org/10.2139/ssrn.1032132

Christian Ewerhart

University of Zurich, Department of Economics ( email )

Schoenberggasse 1
Zurich, CH-8001
Switzerland

Patrick W. Schmitz (Contact Author)

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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