"In labor markets, the ratchet effect refers to a situation where workers subject to performance pay choose to restrict their output, because they rationally anticipate that firms will respond to higher output levels by raising output requirements or cutting pay. We model this effect as a...

We devise an experiment to explore optimal contracts in a hidden-information context. A principal offers one of three possible contract menus to a team of two agents of unknown skill levels, with both agents' participation needed for production. We observe numerous rejections of the more...