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American Economic Journal: Microeconomics: Vol. 5 No. 3 (August 2013)

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Contracts for Agents with Biased Beliefs: Some Theory and an Experiment

Article Citation

Sautmann, Anja. 2013. "Contracts for Agents with Biased Beliefs: Some Theory and an Experiment." American Economic Journal: Microeconomics, 5(3): 124-56.

DOI: 10.1257/mic.5.3.124

Abstract

This paper experimentally tests the predictions of a principal-agent model in which the agent has biased beliefs about his ability. Overconfi dent workers are found to earn lower wages than underconfi dent ones because they overestimate their expected payoff , and principals adjust their off ers accordingly. Moreover, the profi t-maximizing contract distorts e ffort by varying incentives according to self-con fidence, although only the most successful principals use this strategy. These fi ndings have implications for the labor market; in particular, self-con fidence is often correlated with gender, implying that principals would prefer to hire men over women simply because they are more overconfi dent.

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Authors

Sautmann, Anja (Brown U)

JEL Classifications

D82: Asymmetric and Private Information; Mechanism Design
D83: Search; Learning; Information and Knowledge; Communication; Belief
D86: Economics of Contract: Theory

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