Comparing Incentive Contract Types in an Integrated Risk Setting

• In Event: 5.02 Management Accounting Incentives and Behavior

Abstract

In this study, we experimentally investigate how performance risk and relational risk affect a principal’s offering of gift, bonus, and penalty contracts and the subsequent motivational effect of these three contracts on agents. Prior literature has not directly compared performance contingent contracts to gift contracts, and extrapolation from existing empirical data is difficult because the literature has typically examined each in settings more conducive to the modeled mechanism through which each acts (i.e., interactive settings for gift exchange and settings with stochastic production and unobservable effort for performance contingent contracts). By integrating these settings we observe that gift exchange is less preferred and less effective than performance contingent contracts. Most importantly, we demonstrate that performance contingent contracts within interactive settings invoke reciprocity concerns suggesting that performance contingent contracts not only function as incentive compatible instruments consistent with agency models but also as behavioral instruments consistent with models of gift exchange.

Authors

• Ta Tung Cheng, Georgia State University

• Michael John Majerczyk, Georgia State University

• James Wilhelm, Georgia State University