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Get More for Less? An Experimental Study of a Non-Monotone Pay Scheme

In this paper we test a dynamic agency model. The incentive compatible contract is non-monotone and does not award the highest pay to the most successful agent. Based on the assumption that agents are rational we expect them to choose high effort despite the non-monotonicity of the contract. Three treatments with differing information structures are analyzed. Overall, the experiments confirm the model and show that the non-monotone contract has the desired incentive effects. Furthermore, principals strictly prefer the non-monotone contract over a monotone contract that would ex ante lead to a lower expected surplus for them. Observed learning behavior of agents accords with learning direction theory. Possible extensions of the experiments to analyze the impact of fairness and reciprocity in detail are discussed.