An Experiment Study on the Effects of Overconfidence on Employment Contract Selection

摘要

This paper examines the effects of overconfidence on employees' contract selection decisions when they are not completely recognizing their performance capability for job-related skills. We perform a roleplaying experiment under Chinese economic and cultural context to test our results. The results show that: individuals with incomplete personal capability cognitions will tend to be overconfident about their performance abilities and such overconfidence will make they incorrectly select a performance-based contract when they should select a fixed-pay contract, then result in lower earnings. Considering the costs on turnover, although the switch behaviors are not significant between the individuals that have different cognition level on performance capability for job-related skills, once individuals with incomplete personal capability cognitions learn their actual performance capability, they will be more likely to switch performance-based contracts to fix-pay contracts in a subsequent period than participants who know their performance capability at the time of initial contract selection. The paper also discusses the implications of these findings, such as some application value for employers to reduce the costs of hiring or employees to choose the best contracts.