We examined the incentive eects inherent to funding contracts experimentally. Surpris-ingly, at the beginning of the experiment we found no incentive eects at all: eort is the same independent of the contract condition. This shows that there are limits to grasping
accumulates, incentive eects increasingly govern behavior. With sucient experience behavior is largely consistent with the theoretical predictions so that the dierential in-centive eects of funding contracts apply in the long run. As a consequence we also nd support for the non-monotonic-contracts and the monotonic-contracts hypotheses.
The nding that experience crucially determines how the incentives of funding con-tracts aect behavior is of particular importance in our setting as real life entrepreneurs, who are endowed with all sorts of projects, dier in their experience. For example, any entrepreneur requiring external nance to start a project is inexperienced with the implications of funding contracts at the beginning of the entrepreneurial career. Our results suggest that no eciency loss arises with standard debt or equity in these cases due to limited introspection. The inexperienced entrepreneurs, however, suer from their inexperience as they receive lower incomes than predicted due to ling for bankruptcy less often and repaying to the investor more often than is expected. Depending on the individual entrepreneur and the particular project(s), there are entrepreneurs who accu-mulate experience with the incentive eects of funding contracts over the course of their careers. In contrast to the inexperienced ones, we provide evidence that ineciencies arise with the experienced entrepreneurs under the standard debt contract and the equity contract. Replacing these contracts by non-monotonic contracts would mitigate the losses in allocative eciency. One possibility of setting up non-monotonic contracts is to com-bine a standard debt contract with bonus payments of the investor to the entrepreneur conditional on reaching relatively high return states.
Interestingly our data allows us to see if the learning of incentives applies not only globally but also locally. The estimation of the EWA model revealed that exposure to experience matters if behavior starts out far away from the optimal eort choice as in the SDC and Equity conditions. This type of global learning should be expected as the rewards from learning, that is the payos when moving into the direction of optimal choice, increase in the distance of actual choice to optimal choice. If actual choice begins in the neighborhood of optimal choice, it might be less obvious if exposure would matter.
The EWA estimates show, however, that increasing exposure to incentives also matters if choice behavior starts out in the neighborhood of the optimal eort level as in the NMC and NoRepay conditions.
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