Theoretical analyses of (optimal) performance measures are typically performed within the realm of the linear agency model. This model implies that, for a given compensation scheme, the agent’s optimal effort is unrelated to the amount of noise in the performance measure. In contrast,...

This paper reports the results of an individual real effort laboratory experiment where subjects are paid for measured performance. Measured performance equals actual performance plus noise. We compare a stable environment where the noise is small with a volatile environment where the noise is...

Women are often less willing than men to compete, even in tasks where there is no gender gap in performance. Also, many people experience competitive contexts as stressful and previous research has documented that men and women sometimes react differently to acute stressors. We use two...

We examine how self-selection of workers into firms depends on the power of the firms' incentive schemes and how it affects the performance of firms that increase the power of the incentive schemes. In a laboratory experiment, we let subjects choose between (low-powered) team incentives and...

This paper reports the results from a large-scale laboratory experiment investigating the impact of tournament incentives and wage gifts on creativity. We find that tournaments substantially increase creative output, with no evidence for crowding out of intrinsic motivation. By comparison, wage...

Baker (2002) has demonstrated theoretically that the quality of performance measures used in compensation contracts hinges on two characteristics: noise and distortion. These criteria, though, will only be useful in practice as long as the noise and distortion of a performance measure can be...

Distorted performance measures in compensation contracts elicit suboptimal behavioral responses that may even prove to be dysfunctional (gaming). This paper applies the empirical test developed by Courty and Marschke (2008) to detect whether the widely used class of Residual Income based...

This paper analyzes empirically the relationship between pay and performance. Economic and psychological theories predict that the design and implementation of a performance measurement and compensation system affect the motivation of employees. Our survey results demonstrate a positive...

In many workplaces co-workers have the best information about each other's effort. Managers may attempt to exploit this information through peer evaluation. I study peer evaluation in a pure moral hazard model of production by two limitedly liable agents. Agents receive a signal about their...

A worker's utility may increase with his income, but envy can make his utility decline with his employer's income. This article uses a principal-agent model to study profit-maximizing contracts when a worker envies his employer. Envy tightens the worker's participation constraint and so calls...