American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Incentive Complexity, Bounded Rationality, and Effort Provision
American Economic Review
(pp. 4404–37)
Abstract
Using field and laboratory experiments, we demonstrate that the complexity of incentive schemes and worker bounded rationality can affect effort provision. This is because some attributes of the incentives become opaque; that is, workers do not take them into account. In our setting, workers overprovide effort relative to a fully rational benchmark, improving efficiency. We identify contract features, and facets of worker cognitive ability, that matter for opacity. We find that even relatively small degrees of opacity can cause large shifts in behavior. Our results illustrate important implications of complexity and bounded rationality for designing and regulating workplace incentive contracts.Citation
Abeler, Johannes, David Huffman, and Collin Raymond. 2025. "Incentive Complexity, Bounded Rationality, and Effort Provision." American Economic Review 115 (12): 4404–37. DOI: 10.1257/aer.20230751Additional Materials
JEL Classification
- C90 Design of Experiments: General
- D21 Firm Behavior: Theory
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- J22 Time Allocation and Labor Supply
- J31 Wage Level and Structure; Wage Differentials
- J41 Labor Contracts