Asymmetric Information in Wage Contracts: Experimental Evidence and Welfare Implications

Daniel Herbst

No 26272, RFBerlin Discussion Paper Series from ROCKWOOL Foundation Berlin (RFBerlin)

Abstract: Compared to self-employment or performance-based pay, fixed wages reduce earnings uncertainty but are prone to market distortions through moral hazard and adverse selection. Using a model of wage contracts under asymmetric information, I show that these distortions map to marginal treatment response functions in a marginal treatment effects (MTE) framework. I apply this framework to a field experiment in which data-entry workers choose between a randomized fixed wage and a piece rate. I find evidence of both moral hazard and adverse selection: Fixed wages reduce worker productivity by an estimated 8.74 percent relative to the mean. Meanwhile, a 10 percent increase in the wage offer attracts a marginal worker whose productivity is higher by 1.90 percent of the mean. Using semi-parametric MTE estimation, I calculate the welfare loss associated with asymmetric information and the marginal values of public funds (MVPFs) for policies aimed at recovering this loss. I find that a tax on piece rates can mitigate adverse selection into fixed wages, generating tax revenue at social costs as low as $0.88 per dollar.

Keywords: compensation structure; wage insurance; performance pay; adverse selection; moral hazard; information asymmetries; marginal treatment effects (search for similar items in EconPapers)
JEL-codes: D82 J33 J38 M52 (search for similar items in EconPapers)
Date: 2026-10
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