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The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures

Abstract

Non-monotone incentive structures, which - according to theory - are able to induce optimal behavior, are often regarded as empirically less relevant for labor relationships. We compare the performance of a theoretically optimal non-monotone contract with a monotone one under controlled laboratory conditions. Implementing some features relevant to real-world employment relationships, our paper demonstrates that, in fact, the frequency of income-maximizing decisions made by agents is higher under the monotone contract. Although this observed behavior does not change the superiority of the non-monotone contract for principals, they do not choose this contract type in a significant way. This is what we call the monotonicity puzzle. Detailed investigations of decisions provide a clue for solving the puzzle and a possible explanation for the popularity of monotone contracts.

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URN: urn:nbn:de:0009-20-24985

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Recommended citation

Brosig J, Lukas C, Riechmann T (2010). The Monotonicity Puzzle: An Experimental Investigation of Incentive Structures. BuR - Business Research, Vol. 3, Iss. 1, pp. 8-35, URN: urn:nbn:de:0009-20-24985

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