Fairness and Incentives in a Multi-Task Principal-Agent Model

25 Pages Posted: 24 May 2004

See all articles by Ernst Fehr

Ernst Fehr

University of Zurich - Department of Economics

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

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Date Written: April 30, 2004

Abstract

This paper reports on a two-task principal-agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece rate contracts. Many principals reward high efforts on both tasks with substantial bonuses. Agents anticipate this and provide high efforts on both tasks. In contrast, almost all agents with a piece rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the self-interest theory but is consistent with theories of fairness.

Keywords: Incentives, moral hazard, multiple tasks, fairness, experiments

JEL Classification: C7, C9, J3

Suggested Citation

Fehr, Ernst and Schmidt, Klaus M., Fairness and Incentives in a Multi-Task Principal-Agent Model (April 30, 2004). Available at SSRN: https://ssrn.com/abstract=549241 or http://dx.doi.org/10.2139/ssrn.549241

Ernst Fehr

University of Zurich - Department of Economics ( email )

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Klaus M. Schmidt (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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