Managerial expertise, learning potential and dynamic incentives: get more for less?

Abstract

In this paper the impact of ability and learning potential on incentive contracts is analyzed. A central feature of the model is that the true ability will not be revealed. The learning potential of an agent is modeled as the magnitude of impact on the agent's expected ability that learning-by-doing has in a given task. Absent a managerial labor market, depending on an agent's learning potential, a monotone or non-monotone pay structure may be optimal. The second important result is that using agents' ability distributions as inputs to information systems, higher learning potentials lead to less costly information systems, i.e. actions can be implemented at lower costs. Additionally, it is proven that the criteria cost minimization and value maximization are equivalent in the model's context. Copyright © 2007 John Wiley & Sons, Ltd.

The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures

“…The analytical model underlying our contract design is adopted from Lukas (2007b). According to this model, an agent can choose between "effort" and "no effort" in each of the two periods the contract lasts.…”

“…Table 1 lists the probabilities to achieve a given outcome sequence contingent on the agent's effort choices. They are obtained by setting α = 2, β = 1, q = 2, e 1 = 1, e 0 = 0, p 1 = 1, and p 0 = 0.68 in Lukas ' (2007b) model. Following Lukas (2007b, let e i , i ∈ 0; 1 indicate first-period effort while p j , j ∈ 0; 1 indicates second-period effort.…”

Contract design in dynamic agency: An experimental analysis

“…Especially in situations where innovative activity or employee qualification effort is needed, it may be counterproductive to reward short‐term success. Theoretical research by Lukas () and Manso () suggests that optimal contracts should tolerate early failure (which means there is no bonus for early success or even a bonus for early failure) and thereby reward long‐term success. Designing and implementing such contracts could be difficult in practice.…”

“…Derivations of terms, proofs of results, and interpretations of the model are contained in Lukas ().…”

“…Hartmann and Slapničar (2015) test different bonus contracts including deferred bonuses in the context of investment decisions.4 Derivations of terms, proofs of results, and interpretations of the model are contained inLukas (2007b).5 CompareLukas (2007b), p. 200. 6 In the experiment, the terms principal and agent were not mentioned.Instructions used first mover (employer) and second mover (employee) to refer to the contracting parties.7 Research in ultimatum games shows that utterly unequal shares of payoffs are not mutually acceptable for participants.…”