This paper reports on a two-task principal-agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece rate contracts. Many principals reward high efforts on both...

Classic financial agency theory recommends compensation through stock options rather than shares to induce risk neutrality in otherwise risk averse agents. In an experiment, we find that subjects acting as executives do also take risks that are excessive from the perspective of shareholders if...

We consider a model of moral hazard with limited liability of the agent and effort that is two-dimensional. One dimension of the agent's effort is observable and the other is not. The principal can thusmake the contract conditional not only on outcome but also on observable effort. The...