Incentive Alignment and Effort Provision in Multitask Contracts: A Basic Test of the Theory

Abstract I explore the relationship between incentive alignment and effort provision in the canonical multi-task principal-agent contract model. I rely on an experiment where human subjects act as agents making effort decisions based on contract structures providing both theoretically-correct and distorted incentives. Results suggest that distorted contracts, offering weaker incentives than theory recommends, may be less detrimental than expected when performance and quality are well-aligned. The experiment also confirms the theoretical prediction that strong incentives, when misalignment is severe, can increase effort but reduce the principal’s profit. The findings contribute to understanding the prevalence of contracts with weaker-than-optimal incentives, suggesting that such incentive schemes may be more prevalent in the real world when the cost of providing less-than-ideal incentives is relatively low.