The effects of contract framing on misconduct

Abstract

This study examines the effects of incentive contract framing on two types of misconduct: misreporting and shirking. I conduct a 2x2 between subjects experiment, manipulating incentive contract framing (Bonus/Penalty) and the awareness of the opportunity to misreport (Before Effort/After Effort). I predict and find that (1) penalty contracts cause a higher rate and degree of misreporting, (2) this greater misreporting occurs due to a greater sense of entitlement to the incentive funds, and (3) even though misreporting occurs more with penalties, people shirk more in response to a bonus. Collectively, this study’s theory and results indicate that while penalty contracts can increase effort relative to bonus contracts, they also encourage greater dishonesty in reporting when that effort is not successful.