Abstract

We design an experiment to test what motivates agents to choose higher effort and how well principals anticipate agent responses. Principals rank five contracts where a higher ranking increases the likelihood of a contract's implementation. In one treatment, those rankings remain hidden from agents; in the other, agents view the rankings. Agent response to contract structure and monetary incentives largely conforms to our predictions: agents demonstrate a preference for monotonic contracts over non-monotonic contracts, and the vast majority responds favorably to contracts where high effort is a best response. Surprisingly, offering a flat contract that exactly compensates agents for effort performs no better than offering nothing. Principals, however, poorly anticipate agent response to contracts, regardless of the observability of rankings. Additionally, although differences in observable rankings only affect agent behavior in minor ways, principals' rankings between the two treatments indicate principals believed different rankings would significantly influence agents when observable.