Brosig, Jeannette Lukas, Christian Riechmann, Thomas
Year of Publication:
[Journal:] BuR - Business Research [ISSN:] 1866-8658 [Volume:] 3 [Year:] 2010 [Issue:] 1 [Pages:] 8-35
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.