An experimental comparison of incentive contracts in partnerships

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Abstract

Empirical work comparing individualized sharing and equal sharing schemes in partnerships has produced mixed results. Some studies find individualized sharing schemes superior, others find no difference, and still others find equal sharing schemes superior. This paper outlines a theory which reconciles these competing findings, and tests it with an experiment. We find that in conditions of high synergy (when the teammate's effort has a proportionately larger impact on an agent's output than the agent's own effort), equal sharing schemes outperform individualized sharing schemes, while in conditions of low synergy, individualized sharing schemes outperform equal sharing schemes. These results are consistent with observations from the field. Our results have the potential to guide firms choosing between competing compensation contracts by identifying situations under which each contract type is likely to yield increased productivity.

Original languageEnglish (US)
Pages (from-to)78-87
Number of pages10
JournalJournal of Economic Psychology
Volume34
DOIs
StatePublished - Feb 1 2013
Externally publishedYes

Bibliographical note

Funding Information:
We gratefully acknowledge an Associate Editor and two anonymous referees for helpful comments. We are grateful to the Center for Behavioral and Experimental Economic Science and The Negotiations Center at the University of Texas at Dallas, and the Smith Experimental Economics Research Center at Shanghai Jiao Tong University for providing financial and logistical support.

Copyright:
Copyright 2013 Elsevier B.V., All rights reserved.

Keywords

  • Contract
  • Incentive
  • Partnership
  • Synergy

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