Performance measurement, expectancy and agency theory: An experimental study

Theoretical analyses of (optimal) performance measures are typically performed within the realm of the linear agency model. An important implication of this model is that, for a given compensation scheme, the agent's optimal effort choice is unrelated to the amount of noise in the performance measure. In contrast, expectancy theory as developed by psychologists predicts that effort levels are increasing in the signal-to-noise ratio. We conduct a real effort laboratory experiment to assess the relevance of this prediction in a setting where all key assumptions of the linear agency model are met. Moreover, our experimental design allows us to control expectancy exactly as in Vroom's (1964) original expectancy model. In this setting, we find that effort levels are invariant to changes in the distribution of the noise term, i.e. to expectancy. Our results thus confirm standard agency theory and reject this particular aspect of expectancy theory.