Bounded Rationality, Complexity and Optimal Incentives


This paper provides empirical support for the importance of contract complexity, and heterogeneity in worker bounded rationality, for understanding optimal incentives. Specifically, the paper shows that an important aspect of a workplace incentive scheme – dynamic incentives in the form of the so-called ratchet effect – can be a shrouded attribute that some workers neglect due to complexity. In field experiments within a firm, and in online experiments with real effort tasks, many workers make choices consistent with being unaware of dynamic incentives. Changing the contract to make the dynamic incentives more transparent, or looking at the sub-sample of workers with high cognitive ability, a response to dynamic incentives emerges. The results have several implications: a potential optimal degree of complexity; heterogeneous effects of incentives depending on worker cognitive ability; framing and structure of incentives may matter through the channel of complexity; incentive effects may change over time if learning reduces complexity; firms may want to tailor incentives to the cognitive sophistication of their particular workforce 


  • FAIR will host the seminar on Zoom
  • To join, fill out the registration form at the bottom before Thursday, May 20, 9 AM (GMT +01:00)
  • You will receive an e-mail with the link and password before 11 AM Thursday, May 20.
  • To start, we will mute everyone except for our speaker
  • Questions can be asked during the seminar with the “Raise your hand” feature, in the “participants” tab. You will find it under the list of participants. 
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Seminar schedule

  • The seminar starts at 12:15 and lasts about one hour
  • The host will give a short introduction
  • If there is time, there will be a discussion at the end
  • The host will do a closing summary