BONUS AND PENALTY INCENTIVES CONTRACT CHOICE BY EMPLOYEES

Controlled experiments provided evidence that (1) employees are more l ikely to accept incentive contracts described in bonus terms than cont racts that appear identical except for being described in penalty term s, and (2) when employees' judgment of their past performance is depen dent on memory, the preference for bonus over penalty contracts increa ses with experience. These phenomena are explained in terms of the hum an information processing costs of communicating and evaluating the co ntract terms, and further implications are drawn for the empirical stu dy of contracting.