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Managerial bonuses, subordinates’ disobedience, and coercion

Nikiforakis, Nikos ; Oechssler, Jörg ; Shah, Anwar

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Abstract

This study provides evidence from a laboratory experiment showing that managerial bonuses can affect adversely a manager’s subordinates. In our set up, managers compete to obtain a large bonus which depends partly on the effort exerted by their subordinates. Managers can suggest an effort level and coerce subordinates who disobey by punishing them. When managers compete for individual bonuses, we find that subordinates do not obey their demands. This doubles coercion rates relative to a control treatment without bonuses. In contrast, when managers compete for pooled bonuses which give managers discretionary power over the allocation of the bonus, most subordinates exert maximal effort. Although managers share a substantial fraction of the bonus, they are not worse off than they are with an individual bonus. A model in which agents care about inequality in earnings can account for the main findings in our experiment.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0589
Place of Publication: Heidelberg
Date Deposited: 14 Apr 2015 08:13
Date: March 2015
Number of Pages: 29
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: coercion, managerial incentives, disobedience, hierarchy, tournament.
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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