Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay
C. Kirabo Jackson
Henry S. Schneider
Smith School of Business, Queen's University
NBER Working Paper No. w19645
Moral hazard is endemic to employment relationships and firms often use performance pay and managerial control to address this problem. While performance pay has received much empirical attention, managerial control has not. We analyze data from a managerial-control field experiment in which an auto-repair firm provided detailed checklists to mechanics and monitored their use. Revenue was 20 percent higher under the experiment. We compare this effect to that of quasi-experimental increases in mechanic commission rates. The managerial-control effect is equivalent to that of a 10 percent commission increase. We find evidence of complementarities between the two, suggesting benefits from an all-of-the-above approach. We also find evidence of incentive gaming under performance pay.
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Number of Pages in PDF File: 54
Date posted: November 16, 2013