Behavioral Consequences of Corporate Incentives and Long-Term Bonuses: An Experimental Study

This paper examines whether long-term managerial bonus schemes change the allocative behavior of subjects in a laboratory setting. Using four different compensation schemes, we show that a necessary condition for reconciling divergent time preferences between principals and agents is a compensation scheme that induces behavior consistent with lower discount rates. Within subject results show that subjects recognize changes across compensation schemes and change their behavior as predicted by formal theory. Results also suggest that subjects become more myopic in their investment decisions if compensation contracts are incorrectly structured.