Incentive Complexity, Bounded Rationality and Effort Provision

195 Pages Posted: 6 Jul 2023

See all articles by Johannes Abeler

Johannes Abeler

University of Oxford

David Huffman

IZA Institute of Labor Economics; Swarthmore College

Collin Raymond

Purdue University; Cornell SC Johnson College of Business

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Abstract

Using field and laboratory experiments, we demonstrate that the complexity of incentive schemes and worker bounded rationality can affect effort provision, by shrouding attributes of the incentives. In our setting, complexity leads workers to over-provide effort relative to a fully rational benchmark, and improves efficiency. We identify contract features, and facets of worker cognitive ability, that matter for shrouding. We find that even relatively small degrees of shrouding can cause large shifts in behavior. Our results illustrate important implications of complexity for designing and regulating workplace incentive contracts.

Keywords: complexity, bounded rationality, shrouded attribute, ratchet effect, dynamic incentives, field experiments

JEL Classification: D8, D9, J2, J3

Suggested Citation

Abeler, Johannes and Huffman, David and Raymond, Collin, Incentive Complexity, Bounded Rationality and Effort Provision. IZA Discussion Paper No. 16284, Available at SSRN: https://ssrn.com/abstract=4501887 or http://dx.doi.org/10.2139/ssrn.4501887

Johannes Abeler (Contact Author)

University of Oxford ( email )

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David Huffman

IZA Institute of Labor Economics ( email )

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Swarthmore College

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Collin Raymond

Purdue University ( email )

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West Lafayette, IN 47907
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Cornell SC Johnson College of Business ( email )

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