Non-monotone incentive structures, which — according to theory — are able to induce optimal behavior, are often regarded as empirically less relevant for labor relationships. We compare the performance of a theoretically optimal non-monotone contract with a monotone one under controlled laboratory conditions. Implementing some features relevant to real-world employment relationships, our paper demonstrates that, in fact, the frequency of income-maximizing decisions made by agents is higher under the monotone contract. Although this observed behavior does not change the superiority of the non-monotone contract for principals, they do not choose this contract type in a significant way. This is what we call the monotonicity puzzle. Detailed investigations of decisions provide a clue for solving the puzzle and a possible explanation for the popularity of monotone contracts.
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Brosig, J., Lukas, C. & Riechmann, T. The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures. Bus Res 3, 8–35 (2010). https://doi.org/10.1007/BF03342713
- experimental agency
- non-monotone contracts