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on Contract Theory and Applications |
| By: | Abeler, Johannes (University of Oxford); Huffman, David B. (University of Pittsburgh); Raymond, Collin (Purdue University) |
| Abstract: | Using field and laboratory experiments, we demonstrate that the complexity of incentive schemes and worker bounded rationality can affect effort provision, by shrouding attributes of the incentives. In our setting, complexity leads workers to over-provide effort relative to a fully rational benchmark, and improves efficiency. We identify contract features, and facets of worker cognitive ability, that matter for shrouding. We find that even relatively small degrees of shrouding can cause large shifts in behavior. Our results illustrate important implications of complexity for designing and regulating workplace incentive contracts. |
| Keywords: | complexity, bounded rationality, shrouded attribute, ratchet effect, dynamic incentives, field experiments |
| JEL: | D8 D9 J2 J3 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16284&r=cta |
| By: | Matthias Fahn; Nicolas Klein |
| Abstract: | Consider a repeated principal-agent setting with verifiable effort and an extra profit that can materialize only if the agent is talented. The agent is overconfident and updates beliefs using Bayes’ rule. The agent's principal-expected compensation decreases over time until high talent is revealed; thus he may be employed only if beliefs are sufficiently low. We apply these results to a firm's promotion policy, which may be based on success in a previous job even if jobs are uncorrelated. This provides an explanation for the "Peter Principle" in a setting with verifiable performance and highly confident workers (Benson et al., 2019). |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2023-06&r=cta |
| By: | Michael Geruso; Timothy Layton; Adam Leive |
| Abstract: | Existing research on selection in insurance markets focuses on how adverse selection distorts prices and misallocates products across people. This ignores the distributional consequences of who pays the higher prices. In this paper, we show that the distributional incidence depends on the correlations between income, expected costs, and insurance demand. We discuss the general implications for the design of subsidies and mandates when policymakers value both equity and efficiency. Then, in an empirical case study of a large employer, we show that the incidence of selection falls on higher-income employees, who are more likely to choose generous health insurance plans. |
| JEL: | D31 D8 D82 H22 I13 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31435&r=cta |
| By: | Saurabh Amin; Patrick Jaillet; Haripriya Pulyassary; Manxi Wu |
| Abstract: | We study a market mechanism that sets edge prices to incentivize strategic agents to organize trips that efficiently share limited network capacity. This market allows agents to form groups to share trips, make decisions on departure times and route choices, and make payments to cover edge prices and other costs. We develop a new approach to analyze the existence and computation of market equilibrium, building on theories of combinatorial auctions and dynamic network flows. Our approach tackles the challenges in market equilibrium characterization arising from: (a) integer and network constraints on the dynamic flow of trips in sharing limited edge capacity; (b) heterogeneous and private preferences of strategic agents. We provide sufficient conditions on the network topology and agents' preferences that ensure the existence and polynomial-time computation of market equilibrium. We identify a particular market equilibrium that achieves maximum utilities for all agents, and is equivalent to the outcome of the classical Vickery Clark Grove mechanism. Finally, we extend our results to general networks with multiple populations and apply them to compute dynamic tolls for efficient carpooling in San Francisco Bay Area. |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2307.03994&r=cta |