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Experimental evidence on the appropriateness of non-monotone incentive contracts

Non-monotone contracts, which can well represent the theoretically optimal choice of a contracting problem, are often deemed as non-plausible labor contracts and attention is (therefore) confined to monotone if not linear contracts. In this paper we test the incentive effects of non-monotone contracts in a simple principal-agent setting. Principals select either a monotone or a non-monotone contract, both are incentive compatible, and agents then decide which effort level to choose. The results show that principals do select the non-monotone contract, agents virtually never reject the non-monotone contract and they expend that effort level which is desired by principals.