Christian Ewerhart and Patrick W. Schmitz
Journal of Economic Behavior and Organization, Vol. 43 (1), 2000, 115-125.
Abstract. In a pioneering approach towards the explanation of the phenomenon of 'yes man' behavior in organizations, Prendergast (1993) argued that incentive contracts in employment relationships generally make a worker distort his privately acquired information. This would imply that there is a trade-off between inducing a worker to exert costly effort and inducing him to tell the truth. In contrast, we show that with optimally designed contracts, which we term integrity contracts, the worker will both exert effort and report his information truthfully, and that hence the first best can be achieved.
The working paper version is available for download at SSRN.
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