Incentive Effects of Funding Contracts: An Experiment

J. Philipp Reiss and Irenaeus Wolff

No 70, TWI Research Paper Series from Thurgauer Wirtschaftsinstitut, Universität Konstanz

Abstract: We examine the incentive effects of funding contracts on entrepreneurial effort decisions and allocative efficiency. We experiment with four types of contracts (standard debt contract, outside equity, non-monotonic contract, full-subsidy contract) 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. We test this non-monotonic-contracts hypothesis in the laboratory as well. 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 the non-monotonic-contracts hypothesis: we find that the replacement of a standard debt contract by a repayment-neutral non-monotonic contract increases entrepreneurial income by 170% and total surplus by 30% in our setting.

Keywords: hidden information; funding contracts; incentives; experiment; standard debt contract; non-monotonic contract (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cta, nep-exp and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.twi-kreuzlingen.ch/wp-content/uploads/ ... ss-wolff-2011-10.pdf

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 (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:twi:respas:0070

Access Statistics for this paper

More papers in TWI Research Paper Series from Thurgauer Wirtschaftsinstitut, Universität Konstanz Contact information at EDIRC.
Bibliographic data for series maintained by Urs Fischbacher ().