Incentive contracts when agents distort probabilities

• 成果类型: Article
• 署名作者: Gonzalez-Jimenez, Victor
• 署名单位: Erasmus University Rotterdam - Excl Erasmus MC; Erasmus University Rotterdam
• 刊物名称: QUANTITATIVE ECONOMICS
• ISSN/ISSBN: 1759-7323
• DOI: 10.3982/QE2275
• 发表日期: 2024
• 页码: 607-653
• 关键词: Contracts; risk attitude; incentives; probability weighting; experiments; C91; D81; D82; D86; D90

摘要

I show that stochastic contracts generate powerful incentives when agents suffer from probability distortion. When implementing these contracts, the principal can target probability distortions in order to inflate the agent's perceived benefits of exerting high levels of effort. This novel source of motivation is absent in contracts traditionally regarded as optimal. A theoretical framework and an experiment demonstrate that stochastic contracts implemented with small probabilities, which expose the agent to a high degree of risk, generate higher performance than cost-equivalent contracts with lower or no risk exposure. I find that probability distortions that result from likelihood insensitivity-cognitive limitations that prevent the accurate evaluation of probabilities-account for this finding. The results highlight the limits of contracts traditionally regarded as optimal.