This paper reports results from an experiment studying contract design in a dynamic 2-period agency relationship with unobservable effort. A deferred compensation contract is theoretically optimal—it places all incentives on… Click to show full abstract
This paper reports results from an experiment studying contract design in a dynamic 2-period agency relationship with unobservable effort. A deferred compensation contract is theoretically optimal—it places all incentives on the outcomes in the second period. Observed contract choices offer a substantial part of the incentives for the high outcome in the first period suggesting a strong preference for timely rewards. Information about theoretically optimal bonuses and effort decisions shifts contract choices towards a deferred compensation contract. This contract structure is more profitable for principal participants.
Journal Title: Managerial and Decision Economics
Year Published: 2017
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