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

C. Kirabo Jackson () and Henry Schneider

No 19645, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D0 D82 D86 H0 J0 J33 J41 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-bec, nep-cta, nep-exp, nep-hrm and nep-lab
Note: LS PE
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