This paper shows that it is profitable for a firm to hire an overoptimistic manager to commit to a certain investment strategy in an R&D tournament situation. In the unique symmetric equilibrium, all firms delegate to overoptimistic managers, where the optimal degree of overoptimism depends on...

Using the concept of Inequity Aversion we derive in a Moral Hazard setting several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards...

We analyze the Moral Hazard problem, assuming that agents are inequity averse. Our results differ from conventional contract theory and are more in line with empirical findings than standard results. We find: First, inequity aversion alters the structure of optimal contracts. Second, there is a...

To investigate the external validity of laboratory results, we combine a public good experiment with three treatments in a field experiment. One treatment offers the opportunity to free-ride, the other two are placebo treatments. We compare results within subjects. In the free-riding treatment,...

An important aspect in determining the effectiveness of gift exchange relations in labor markets is the ability of the worker to "repay the gift" to the employer. To test this hypothesis, we conduct a real effort laboratory experiment where we vary the wage and the effect of the worker's effort...

We address the question how much authority a principal should delegate to a manager with conflicting interests and uncertain ability in a context in which the manager has both compensation-based and reputational incentives. The optimal level of authority balances the value of the manager's...