Both psychologists and economists have argued that rewards often have hidden costs. One possible reason is that the principal may have incentives to offer higher rewards when she knows the task to be difficult. Our experiment tests if high rewards embody such bad news and if this is perceived by...

The Peter Principle captures two stylized facts about hierarchies: first, promotions often place employees into jobs for which they are less well suited than for that previously held. Second, demotions are extremely rare. Why do organizations not correct 'wrong' promotion decision? This paper...

The Peter Principle captures two stylized facts about hierarchies: first, promotions often place employees into jobs for which they are less well suited than for that previously held. Second, demotions are extremely rare. Why do organizations not correct 'wrong' promotion decision? This paper...

Inefficient job assignments are usually explained with incomplete information about employees' abilities or contractual imperfections. We show that inefficient assignments arise even with full information about employees' types and complete contracts. Our further results provide a new...

The paper explores the "hidden costs of rewards" in a dynamic principal-agent framework, in which an informed principal selects in each period a reward for an agent. It shows that rewards are often addictive in that once offered, a contingent reward makes the agent expect it whenever a similar...

This paper considers the interplay of job assignments with the intrinsic and extrinsic motivation of an agent. Job assignments influence the self confidence of the agent, and thereby his intrinsic motivation. Monetary reward allow the principal to complement intrinsic motivation with extrinsic...

In many economic situations several principals contract with the same agents sequentially. Asymmetric learning about agents' abilities provides the first principal with an informational advantage and has profound implications for the design of incentive contracts. We show that the principal...