Learning to game the system

Abstract

An agent may privately learn which aspects of his job are more important by shirking on some of them, and use that information to shirk more effectively in the future. In a model of long-term employment relationship, we characterize the optimal relational contract in the presence of such learning-by-shirking, and highlight how the performance measurement system can be managed to sharpen incentives. Two related policies are studied: intermittent replacement of existing measures, and adoption of new ones. In spite of the learning-by-shirking effect, the optimal contract is stationary, and may involve stochastic replacement/adoption policies that dilute the agent’s information rents from learning how to game the system.

Incentive Complexity, Bounded Rationality and Effort Provision

“…Or, even if workers are not sophisticated, sufficiently transparent contracts and enough opportunities for learning, could eventually lead to full unshrouding (as we see in our SIMPLE contract). On the other hand, firms may use complexity to try and mitigate the emergence of ratchet effects, as well as other undesirable side-effects of contracts, or may regularly cycle through different contracts as workers learn about the details of the contract (e.g., as in Li, Mukherjee, and Vasconcelos (2021)). Obviously, complexity need not always be beneficial for firms, or efficiency.…”

Gaming a Selective Admissions System

“…More generally, tutoring or buying disability designation resembles an "influence activity" as described by Milgrom (1988) and Milgrom and Roberts (1988). Much of this literature in organizational economics (e.g., Prendergast and Topel, 1996;Ederer et al, 2018;Li et al, 2021) focuses on individual behavior: how individuals respond to incentives in unproductive ways and how to design contracts to reduce gaming. It will be interesting to study how informational externality among individuals and the sequential nature of the selection process affect organizational outcomes, as we do in this article in the context of a selective admissions system.…”

Monitoring with career concerns

“…The key novelty in our work is that the agent's shirking discourages the monitor from investing in her ability, which further encourages shirking. This amplification channel is absent in Li et al (2021).…”

“…In their model, the auditor's ability is fixed and thus there is no interaction between the agent's shirking and the monitor's investment. Li et al (2021) study relational contracts in which the principal chooses performance measures for the agent, which agent learns about by shirking. The key novelty in our work is that the agent's shirking discourages the monitor from investing in her ability, which further encourages shirking.…”