We examine how performance is affected by goal setting, depending on who sets the goal. We first propose a theoretical model of a worker-employer game and then conduct a laboratory experiment to test our theoretical predictions. The game starts with either the worker or the employer setting a goal on output, and then the worker selects a costly (and unobservable) effort level which in turn determines both output and the employer’s income. The worker’s monetary earnings depend on neither goal achievement nor output. Our theory predicts that (i) the worker sets the minimum possible goal, (ii) the employer sets a higher goal than the worker does; (iii) effort is the highest when the employer sets a goal, the lowest when there is no goal at all, and in between when the worker sets a goal. Consistent with our theoretical predictions, our experimental results confirm that the employer sets a higher goal than the worker does. Moreover, the worker’s effort level is the highest when there is goal setting and the employer sets it. However, we find deviations from our other theoretical predictions. We propose modifications to our original model to account for these deviations.