Incentive Complexity, Bounded Rationality, and Effort Provision
Johannes Abeler, David Huffman, Collin Raymond
American Economic Review · 2025 · Volume 115 · Issue 12
Abstract
Using field and laboratory experiments, we demonstrate that the complexity of incentive schemes and worker bounded rationality can affect effort provision. This is because some attributes of the incentives become opaque; that is, workers do not take them into account. In our setting, workers overprovide effort relative to a fully rational benchmark, improving efficiency. We identify contract features, and facets of worker cognitive ability, that matter for opacity. We find that even relatively small degrees of opacity can cause large shifts in behavior. Our results illustrate important implications of complexity and bounded rationality for designing and regulating workplace incentive contracts.
Keywords
Design of Experiments: General, Firm Behavior: Theory, Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, Time Allocation and Labor Supply, Wage Level and Structure, Wage Differentials, Labor Contracts
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