Abstract
Firms using past performance to identify employee’s productivity and to revise targets face an adverse incentive problem. When future targets are ratcheted up for good past performance, agency theory predicts that employees remunerated with budget-based contracts have all the same inclination to opportunism and consequently they all opt not to exert their full effort, in what is called ratchet effect. In this paper, we conduct a multi-period laboratory experiment to examine if and to what extent employees' opportunistic reaction depends on personal traits, as documented by personality and organizational studies. We namely find that high conscientious individuals exhibit a lower ratchet effect, or equivalently, a higher level of effort and performance, than low conscientious individuals. Important implications not yet explored follow in the optimal design of incentive contracts: standardized budget-based contracts are no longer the first-best for all employees. Rather, customizing the contract’s feature to match personality traits motivates employees to do their best. In this direction, this paper finally explores some of these features that could be modified in the attempt to tailor incentive contracts.
Raffaello Seri
Professor of Econometrics
My research interests include statistics, numerical analysis, operations research, psychology, economics and management.