Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay? (WP-14-06)
Kirabo Jackson, Henry Schneider
Moral hazard is endemic to employment relationships and firms often use performance pay and managerial control to address this problem. While performance pay has received much empirical attention, managerial control has not. Jackson and Schneider analyze data from a managerial-control field experiment in which an auto-repair firm provided detailed checklists to mechanics and monitored their use. Revenue was 20 percent higher under the experiment. They compare this effect to that of quasi-experimental increases in mechanic commission rates. The managerial-control effect is equivalent to that of a 10 percent commission increase. They find evidence of complementarities between the two, suggesting benefits from an all-of-the-above approach. They also find evidence of incentive gaming under performance pay.