Adding a Stick to the Carrot? The Interaction of Bonuses and Fines

Ernst Fehr () and Klaus M. Schmidt
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Klaus M. Schmidt: Institute for Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland. efehr@iew.unizh.ch

No 197, Discussion Papers from SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: In this paper we report on a principal-agent experiment where the principal can choose whether to rely on an unenforcable bonus contract or to combine the bonus contract with a fine if the agent’s effort falls below a minimum standard. We show that most principals do not use the fine and that the pure bonus contract is more efficient than the combined contract. Our experiment suggests that principals who are less fair are more likely to choose a combined contract and less likely to actually pay the announced bonus. This offers a new explanation for why explicit and implicit incentives are substitutes rather than complements.

Keywords: moral hazard; bonus contract; implicit incentives; fairness; incentives (search for similar items in EconPapers)
JEL-codes: C7 C9 J3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe and nep-exp
Date: 2007-01
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Journal Article: Adding a Stick to the Carrot? The Interaction of Bonuses and Fines (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:trf:wpaper:197

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