Incentive Schemes, Sorting, and Behavioral Biases of Employees: Experimental Evidence

Ian Larkin and Stephen Leider ()

American Economic Journal: Microeconomics, 2012, vol. 4, issue 2, 184-214

Abstract: We investigate how the convexity of a firm's incentives interacts with worker overconfidence to affect sorting decisions and performance. We demonstrate, experimentally, that overconfident employees are more likely to sort into a nonlinear incentive scheme over a linear one, even though this reduces pay for many subjects and despite the presence of clear feedback. Additionally, the linear scheme attracts demotivated, underconfident workers who perform below their ability. Our findings suggest that firms may design incentive schemes that adapt to the behavioral biases of employees to "sort in" ("sort away") attractive (unattractive) employees; such schemes may also reduce a firm's wage bill. (JEL D03, D83, J24, J31, M12)

JEL-codes: D03 D83 J24 J31 M12 (search for similar items in EconPapers)
Date: 2012
Note: DOI: 10.1257/mic.4.2.184
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Citations: View citations in EconPapers (61)

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