Both psychologists and economists have argued that rewards often have hidden costs. One possible reason is that the principal may have incentives to offer higher rewards when she knows the task to be difficult. Our experiment tests if high rewards embody such bad news and if this is perceived by...

This paper studies the use of discretionary rewards in a finitely repeated principal-agent relationship with moral hazard. We show that the principal, when she obtains a private subjective signal about the agent's performance, may pay discretionary bonuses to provide credible feedback to the...

The paper explores the "hidden costs of rewards" in a dynamic principal-agent framework, in which an informed principal selects in each period a reward for an agent. It shows that rewards are often addictive in that once offered, a contingent reward makes the agent expect it whenever a similar...