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We examine theoretically and experimentally how combining between-team and within-team incentives affects behavior in team tournaments. Theory predicts that free-riding will occur when there are only between-team incentives, and offering within-team incentives may solve this problem. However, if individuals collude, then within-team incentives may not be as effective at reducing free-riding. Consistent with the theoretical predictions, the results of our experiment indicate that although between-team incentives are effective at increasing individual effort, there is substantial free-riding and declining effort over time. Importantly, a combination of between-team and within-team incentives is effective not only at generating effort but also at sustaining effort over time, mitigating free-riding problem, increasing cooperation and decreasing collusion within teams.JEL Classifications: C70, D72, H41

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Incentive contracts are among the most prescribed means for alleviating agency problems. Accordingly, understanding when and why certain types of incentive contracts are effective is of crucial importance to organizations. Prior research documents that while employees generally prefer to work under contracts that include bonuses, employees exert more effort under economically equivalent penalty contracts. One reason for this is that penalties cause employees to experience greater expected disappointment than do bonuses. This study extends prior research in this area by documenting that external locus of control (ELOC), an individual characteristic, helps explain why employees respond to incentive contracts. We predict and find that, compared to individuals with higher ELOC, individuals with lower ELOC are less susceptible to contract frame-induced differences in expected disappointment and are thus not as motivated by penalty contracts compared to bonus contracts. This finding extends theory on contract framing and has important implications for how organizations implement incentive contracts in practice.

Many organizations offer profit sharing plans to motivate increased effort and goal congruence. However, an unintended consequence of such plans may be to reduce honesty in managerial reporting. We investigate two commonly observed profit sharing plans (individual and pooled) in a laboratory experiment where multiple agents with private cost information submit budget requests to an employer. Consistent with our prediction based on crowding theory, our findings suggest that honesty is reduced in the presence of an individual profit sharing plan. However, when a pooled profit sharing plan is used, the adverse effects on honesty are partially mitigated. Our results suggest that an unintended consequence of profit sharing (decreased honesty) can be mitigated through interdependency from pooled plans. The results have practical implications, given that organizations have flexibility in establishing both the size and scope of their profit sharing plans. Our study also contributes to our understanding of reporting behavior, particularly in multi‐agent settings.

Our study examines superiors' allocation decisions for otherwise homogeneous agents facing disparate performance risk (i.e., unequal likelihoods a given amount of effort will translate to an anticipated level of performance). We predict and find that superiors sympathize, through their bonus allocation decisions, with those agents confronted with greater performance risk. However, this behavior changes when superiors are responsible for allocating initial resources between the agents and have task-irrelevant reputational information concerning the agents, such that superiors favor the advantaged agent and give less sympathy to the disadvantaged agent. We provide additional evidence that such favoritism toward the advantaged agent leads to disparity in agents' fairness and satisfaction perceptions. Our results have implications for organizations, given the pervasiveness of discretion in allocation decisions and concerns for fairness, job satisfaction, and their effects on performance.

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