Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay
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. We 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. We 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. We find evidence of complementarities between the two, suggesting benefits from an all-of-the-above approach. We also find evidence of incentive gaming under performance pay.
We thank Dan Benjamin, George Iny, Eli Melnick, Steve Nafziger, Ted O'Donoghue, Joseph Schneider, and Michael Waldman for helpful conversations, and Peter Hlawitschka for excellent research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
- ...carefully crafted and monitored managerial controls over mechanics led to a 20 percent increase in revenue. Employers have long...