Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2022-12-15
Number: 22-090/I
Author-Name: Víctor González-Jiménez
Author-Workplace-Name: Erasmus University Rotterdam 
Title: Optimal Incentives without Expected Utility
Abstract: This paper investigates the optimal design of incentives when agents
distort probabilities. We show that the type of probability distortion
displayed by the agent and its degree determine whether an incentivecompatible contract can be implemented, the strength of the incentives
included in the optimal contract, and the location of incentives on
the output space. Our framework demonstrates that incorporating
descriptively-valid theories of risk in a principal-agent setting leads
to incentive contracts that are typically observed in practice such as
salaries, lump-sum bonuses, and high-performance commissions.
Classification-JEL: D82, D86, J41, M52, M12
Keywords: Contracts, Probability Weighting, Incentives, Mechanism Design,
Rank-Dependent Utility.
File-URL: https://papers.tinbergen.nl/22090.pdf
File-Format: application/pdf
File-Size: 902.291 bytes
Handle: RePEc:tin:wpaper:20220090