The present study investigated whether the use of economic profit in performance-contingent incentive contracts motivates individuals to act more consistently with the long-term goals of the firm when the horizon problem is present. An experimental design was conducted. The experiment used a single factor between-subjects and pre-post treatment with a control group. The experimental task was to invest resources in long-term actions with the goal of maximizing the future cash flow of a photocopy

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... store. The study involved the participation of 76 undergraduate students, divided into three groups, and documented that participants rewarded by contracts based on economic profit acted more congruently with the goal set by devoting more effort to accomplish the task and improving performance in their investment decisions when compared to the control group (rewarded on the basis of a fixed wage) and to the second treatment group (rewarded on the basis of a contingent contemporaneous accounting profit incentive contract). The present study's key findings are consistent with the predictions of the agency theory and suggest that the economic profit helps to mitigate the problem of managerial myopia. These study findings also indicate that the economic profit in incentive contracts motivates agents to act more consistently with the firm's long-term goals even in the presence of the horizon problem. In addition, the present research documented new evidences of the inadequacy of incentive contracts based on distorted performance measures such as accounting profit.