Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100170
Authors: 
Nosenzo, Daniele
Offerman, Theo
Sefton, Martin
van der Veen, Ailko
Year of Publication: 
2014
Series/Report no.: 
CeDEx Discussion Paper Series 2014-04
Abstract: 
We experimentally investigate a repeated "inspection game" where, in the stage game, an employee can either work or shirk and an employer simultaneously chooses to inspect or not inspect. The unique equilibrium of the stage game is in mixed strategies with positive probabilities of shirking/inspecting while combined payoffs are maximized when the employee works and the employer does not inspect. We examine the effects of allowing the employer discretion to sanction or reward the employee after observing stage game payoffs. When employers have limited discretion, and can only apply sanctions and/or rewards following an inspection, we find that both instruments are equally effective in reducing shirking and increasing joint earnings. When employers have discretion to reward and/or sanction independently of whether they inspect we find that rewards are more effective than sanctions. In treatments where employers can combine sanctions and rewards employers rely mainly on rewards and outcomes closely resemble those of treatments where only rewards are possible.
Subjects: 
Inspection Game
Costly Monitoring
Discretionary Incentives
Rewards
Punishment
Experiment
JEL: 
C70
C72
C92
Document Type: 
Working Paper

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