54 Pages Posted: 16 Nov 2013
Date Written: November 2013
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.
Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Suggested Citation: Suggested Citation
Kirabo Jackson, C. and Schneider, Henry S., Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay (November 2013). NBER Working Paper No. w19645. Available at SSRN: https://ssrn.com/abstract=2355651