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“Yes men”, integrity, and the optimal design of incentive contracts


Ewerhart, Christian; Schmitz, Patrick W (2000). “Yes men”, integrity, and the optimal design of incentive contracts. Journal of Economic Behavior & Organization, 43(1):115-125.

Abstract

In a pioneering approach towards the explanation of the phenomenon of “yes man” behavior in organizations, Prendergast [American Economic Review 83 (1993) 757–770] argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off between inducing a worker to exert costly effort and inducing him to tell the truth. In contrast, we show that with optimally designed contracts, which we term integrity contracts, the worker will both exert effort and report his information truthfully, and hence the first best can be achieved.

In a pioneering approach towards the explanation of the phenomenon of “yes man” behavior in organizations, Prendergast [American Economic Review 83 (1993) 757–770] argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off between inducing a worker to exert costly effort and inducing him to tell the truth. In contrast, we show that with optimally designed contracts, which we term integrity contracts, the worker will both exert effort and report his information truthfully, and hence the first best can be achieved.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2000
Deposited On:08 Apr 2010 09:15
Last Modified:05 Apr 2016 14:04
Publisher:Elsevier
ISSN:0167-2681
Publisher DOI:10.1016/S0167-2681(00)00112-8
Permanent URL: http://doi.org/10.5167/uzh-33290

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