Overconfident Individual and Team Compensation Scheme Sorting: Experimental Evidence

This thesis attempts to answer the research question: “Do overconfident individuals and teams sort into different pay-for-performance schemes?”. Respondents in a controlled experiment solve as many as possible math questions in two-minutes individually or in a two-person team. They had to choose how they wanted to be paid-out: a piece-rate or a tournament contract. Although I cannot find any evidence that overconfident individuals and teams sort more into competitive environments compared to rational agents, I do find that performance, risk preference, and social behaviour have an effect on sorting behaviour. There are limited gender differences, and no differences between individuals and teams in their level of overconfidence. Males tend to have an overestimation bias, while females face an overplacement bias. Besides this, more productive agents are attracted by tournaments that pay-out higher monetary rewards above piece-rate contracts. However, tournament contracts involve more risk than piece-rate contracts, and put negative externalities on tournament losers. I conclude that piece-rate contracts are mostly preferred by risk-averse and altruistic agents. Overall, overconfidence seems not to be a driver of sorting behaviour among different types of contracts.