719. Claudia M. Landeo & Kathryn E. Spier, Incentives and Contract Frames Comment, 07/2012; subsequently published in Journal of Institutional and Theoretical Economics, Vol. 168, 2012, 83-88.
Abstract: Principal-agent problems are pervasive in economic settings. CEOs and shareholders,
lawyers and clients, manufacturers and retailers, lenders and borrowers are all examples
of settings in which moral hazard problems might arise. Incentive contracts in both
individual and team environments have been studied by economists (see Shavell (1979)
and Holmstrom (1982, 1979) for seminal theoretical work, and Prendergast (1999) for a
survey of empirical literature). Contracts that tie an agent's compensation to performance,
such as conditional bonus schemes, have been proposed as a way to align the interests of
agents and principals. Experimental literature from economics and social psychology
suggests that the way choices are framed can affect decisions as well. Hence, contract
frames might influence the effectiveness of incentive schemes. This comment first
outlines seminal experimental work on frames and describes a recent study that relates
the incentive contract literature with the experimental work on frames. Second, it
discusses the experimental design and findings of Brooks, Stremitzer, and Tontrup's
(2011) work on individual incentives and contract frames.