Incentive Effects of Funding Contracts: An Experiment

J. Philipp Reiss and Irenaeus Wolff

No 2012-26, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: We examine the incentive effects of funding contracts on entrepreneurial effort decisions and allocative efficiency. We experiment with funding contracts that differ in the structure of investor repayment and, therefore, in the incentives for entrepreneurial effort provision. Theoretically the replacement of a standard debt contract by a repayment-equivalent non-monotonic contract reduces effort distortions and increases efficiency. Likewise the replacement of outside equity by a repayment-equivalent standard-debt contract mitigates distortions. We test both hypotheses in the laboratory. Our results reveal that the incentive effects of funding contracts need to be experienced before they reflect in observed behavior. With sufficient experience observed behavior is consistent with the theoretical predictions and supports both hypotheses. If we allow for entrepreneur-sided manipulations of the project outcome we find that non-monotonic contracts lose its appeal.

Keywords: hidden information; funding contracts; incentives; experiment; standard debt contract; non-monotonic contract; state manipulation (search for similar items in EconPapers)
JEL-codes: C91 D82 G21 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2012-09-30
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-exp, nep-hrm and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Incentive effects of funding contracts: an experiment (2014)
Working Paper: Incentive Effects of Funding Contracts: An Experiment (2012)
Working Paper: Incentive Effects of Funding Contracts: An Experiment (2011)
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