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An experimental study of incentive contracts for short- and long-term employees

Wei Chi, Tracy Liu (), Xiaoye Qian and Qing Ye

Journal of Economic Behavior & Organization, 2019, vol. 159, issue C, 366-383

Abstract: Motivated by real-world observations of different contract offers, we conduct a lab experiment to examine a principal's contract choice and agent effort in both long- and short-term employment relationships, implemented as one-shot and repeated games. We find that a piece-rate contract has the strongest incentive effect on short-term agents’ effort and is the principals’ dominant choice. Nevertheless, the bonus contract works almost as well as the piece-rate contract for long-term relationships, but not so well for short-term relationships. In addition, the bonus contract's effect on effort is mainly driven by the bonus component, suggesting that a fixed wage alone is not an effective mechanism to improve workers’ performance.

Keywords: Incentive contract; Repeated game; Experiment (search for similar items in EconPapers)
JEL-codes: C7 C91 J33 (search for similar items in EconPapers)
Date: 2019
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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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Handle: RePEc:eee:jeborg:v:159:y:2019:i:c:p:366-383