Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay

54 Pages Posted: 16 Nov 2013 Last revised: 7 Mar 2021

See all articles by C. Kirabo Jackson

C. Kirabo Jackson

Northwestern University

Henry S. Schneider

Smith School of Business, Queen's University

Date Written: November 2013

Abstract

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.

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

C. Kirabo Jackson (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Henry S. Schneider

Smith School of Business, Queen's University ( email )

143 Union Street
Kingston, Ontario
Canada

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