Ratchet effect and conscientiousness in a dynamic setting: a laboratory experiment


In control management literature, a myriad of papers have studied incentive schemes grouped in piece-rate and budget-based systems. Advocates of budget–based contracts claim that they are the optimal ones in the presence of information asymmetry. Likewise, a strand of literature has pointed and developed a moral hazard problem that arises in a dynamic setting when targets are revised based on past performance information. And finally, according to the agency theory, this opportunistic behavior takes place in all agents with the same intensity. Business ethics scholars have criticized that labeling the default human behavior as opportunism overlooks individual factors associated with human nature. Empirical evidence in personality and organizational research unambiguously suggests that personal traits affect job-related behaviors and the outcome that organizations value, mainly performance. Leveraging on the findings of the most widely accepted structure of personality, coined as the five-factor model, and specifically in the trait of conscientiousness, in this paper we challenge the agency theory prediction that all agents have the same inclination to opportunism and they do it with the same intensity. Finding opportunistic differences among agents has important consequences in terms of the design of contracts. It could very well happen that the fist-best incentive scheme for an employee would not be the first-best for another employee if theirtraits are different. What might work for an employee might demotivate another, and then there is room to analyze if there exists a universal optimal incentive scheme.To the best of our knowledge, this paper constitutes the first attempt of analyzing the interplay between incentive contracts and personality traits. Its design responds to the following research questions: Which scheme is better and for whom? Should or should not top managers revise targets?

Oct 3, 2012 — Oct 5, 2012
Gran Canaria, Spain
Raffaello Seri
Raffaello Seri
Professor of Econometrics

My research interests include statistics, numerical analysis, operations research, psychology, economics and management.