Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/181638
Authors: 
Rau, Holger
Müller, Stephan
Year of Publication: 
2018
Series/Report no.: 
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2018: Digitale Wirtschaft - Session: Experiments - Incentives C19-V3
Abstract: 
In this paper we study the impact of betrayal aversion on agents' effort provision, when principals have discretion regarding agents' remuneration. We show theoretically that agents who work under a nonbinding bonus contract face a trade off in their effort choice between the likelihood and the level of betrayal. Thus, depending on which effect predominates, betrayal aversion may either undermine or underpin the effectiveness of bonus contracts to induce effort. The data of our experiment reveal a strong detrimental effect of betrayal aversion. If the principal promises to pay a bonus for sufficiently high effort, the message is ineffective when agents are characterized by a high degree of betrayal aversion. In strong contrast, employees with a low degree of betrayal aversion increase their performance by more than 50%, if they received this message. The findings in this article identify an additional hidden cost of economic incentives.
Subjects: 
Betrayal Aversion
Principal Agent Problem
Experiment
JEL: 
C91
D03
D81
Document Type: 
Conference Paper

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