Incentive Complexity, Bounded Rationality, and Effort Provision

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This paper shows that dynamic incentives embedded in an organization’s workplace incentive scheme can be a shrouded attribute, due to contract complexity and worker bounded rationality. This is true in field experiments within the firm, and in complementary online experiments with real effort tasks. Structural estimates indicate that rational agents who fully understand the incentive scheme would behave sigificantly different from what we observe. A response to dynamic incentives does emerge when we reduce complexity or look at workers with higher cognitive ability. The results illustrate the potential value of complexity to organizations, they demonstrate that complex incentive contracts may allow firms to be achieve better than second-best, they identify specific features of contracts that can influence the effectiveness of incentives through the channel of complexity, and they imply heterogeneous effects of incentives depending on worker cognitive ability.


Type of resource text
Date created August 10, 2021


Author Abeler, Johannes
Author Huffman, David
Author Raymond, Collin
Organizer of meeting Bernheim, B. Douglas
Organizer of meeting Beshears, John
Organizer of meeting Crawford, Vincent
Organizer of meeting Laibson, David
Organizer of meeting Malmendier, Ulrike


Subject complexity
Subject bounded rationality
Subject shrouded attributes
Subject field experiments
Subject ratchet effect
Genre Text
Genre Working paper
Genre Grey literature

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Abeler, J., Huffman, D., and Raymond, C. (2022). Incentive Complexity, Bounded Rationality, and Effort Provision. Stanford Digital Repository. Available at


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