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

This paper experimentally tests the predictions of a principal-agent model in which the agent has biased beliefs about his ability. Overcondent workers are found to earn lower wages than undercondent ones because they overestimate their expected payo, and principals adjust their oers accordingly. Moreover, the prot-maximizing contract distorts eort by varying incentives according to self-condence, although only the most successful principals use this strategy. These ndings have implications for the labor market; in particular, self-condence is often correlated with gender, implying that principals would prefer to hire men over women simply because they are more overcondent.