• Selected
• Entire List

Abstract:
Pure incentive schemes rely on agent self-interest, rather than more coercive control, to motivate subordinates. Yet most organizations, and in particular public agencies, rely very little on pure incentive contracts. Most organizations rely on the primarily coercive mechanisms of monitoring and sanctioning that many theorists have found objectionable about hierarchy. We identify a problem we denote as "the principal's moral hazard constraint" which can result in an inefficient reliance on monitoring and sanctioning: even when the agent's behavior can be efficiently shaped by a straightforward incentives scheme, the principal's self-interest may stand in the way of implementing it. In these cases, the bonuses large enough to produce the efficient incentive effect are prohibitively expensive for the principal.

One way out of this trap - the penalization of the agent for poor performance - faces general legal restrictions in the public workforce. Another - to form an ownership agreement with the agent - is impossible due to the ownership structure of government. This means that for a large class of control problems in agencies, and hierarchical control problems more generally, institutional designers must rely on more coercive monitoring-based mechanisms for controlling agents. While monitoring is often thought of as resulting from the agent's moral hazard, it can just as reasonably be seen as resulting from the principal's moral hazard.

hierarchies, principal-agency, risk aversion

Abstract:
While some argue that incomplete incentive contracts facilitate the self-enforcement of informal dealings, other authors submit that they substitute for or "crowd out" social norms supporting informal arrangements. We use experimental evidence to test these theories by manipulating the extent to which individuals transact repeatedly and the level of contract costs. We find that, by enforcing contractible exchange dimensions, contracts facilitate the self-enforcement of non-contractible dimensions. This complementarity effect is particularly important when repetition is unlikely and thus self-enforcement is difficult. Although our data suggest the existence of reciprocity as an alternative, informal enforcement mechanism, evidence that contracts substitute for this social norm is not robust.

Incomplete contracts, self-enforcement, reciprocity, crowding out, trust

Abstract:
Principal-agency theory has analyzed "the principal's problem" - how to write a contract so that incentives will induce an agent to provide the principal with the maximum feasible expected gain. In practice, principal-agent contracts are negotiated not imposed. This paper reports an experiment which reveals that agent compliance is determined less by the negotiated terms of the contract than by expectations shaped by the negotiation process itself. These results justify further research on the politics of negotiation and of bureaucratic politics. The experiments also extend the study of negotiation beyond the construction of an agreement between parties to an examination of the post-negotiation implementation of that agreement.

Negotiation, Agency Theory, Social Exchange

Abstract:
When there are constantly new, valuable opportunities to transact with alternative partners — a situation we refer to as exchange value uncertainty — long-term or committed transactions among the same individuals are discouraged. But when opportunism creates exchange hazards, which escalate in non-recurring transactions, individuals will be reluctant to take full advantage of the gains from switching to more valuable partners, thereby leading to "overembedded" exchanges. Two mechanisms may encourage movement out of committed relationships in those conditions. First, formal contracts should serve as a safeguard to market participants, in the sense that they limit potential losses due to opportunistic behavior. Second, trust in general others (as opposed to trust in familiar people) reduces participants' perception of hazards in market exchanges and hence promotes transactions among strangers. By increasing the propensity to initiate new exchanges, general trust also diminishes the role of contracts in causing movement out of committed relationships. In this paper, we present experimental evidence largely consistent with this theory of the interplay between formal and informal mechanisms in the determination of social mobility.

Commitment, cooperation, social exchange, contracts, trust, embeddedness

Abstract:
The principal-agent problem is fundamental to organization design. A principal must negotiate an incentive contract to motivate a more risk averse agent to undertake costly actions that cannot be observed. In rational choice theory, the problem is solved through an inefficient shifting of risk from principal to agent. However, neither field studies nor prior experiments have observed the types of contracts nor the agent response predicted by this theory. Two experiments were conducted to test a modular social cognition theory explanation for this discrepancy. According to this alternative to rational choice theory, individuals have evolved specialized cognitive capabilities for dealing with exchange relations. These very human capabilities do not operate by the same logic as rational choice. Both a study of individual agent decisions to a series of hypothesized contracts in experiment one and the interactive bargaining of experiment two yielded results consistent with the modular theory. The logic of social exchange is quite different from the logic of individual choice or game theory. Implications for theory and practice are considered.

Negotiation, Gift Exchange, Principal Agent Theory

Abstract:
Social, economic, and organizational development require a degree of stable policy making. The instability of group decision making under majority rule has preoccupied social theorists since Condorcet in the late 18th century. In theory, subtle institutional modifications to pure majority rule may be sufficient to induce stability. This paper reviews experimental evidence regarding these stability inducing modifications. The experiments examine the impact of agenda control, super-majority voting requirements, veto powers, and bicameralism on group decision making.

Voting, agenda control, veto power

Abstract:
Social and economic development requires some degree of stable policy making. The instability of group decision making under majority rule ahs preoccupied social theorists since Condorcet. In theory, subtle institutional modifications to pure majority rule should induce stability. This paper reviews experimental evidence regarding these stability inducing modifications. The experiments examine the impact of agenda control, super-majorities, veto powers, and bicameralism on group decision making.

Abstract:
Since 1965 a significant portion of the USDA's extramural research budget has been directly earmarked by Congress for particular research projects. We analyze the process by which a minority of Congress, specifically members of the House and Senate Agricultural Appropriations Subcommittees, induces the USDA to carry out its budgetary suggestions. We present evidence that demonstrates the influence that appropriators possess over the allocation of earmarked grants. Finally, we argue that this program provides an excellent illustration of path-dependence in government policy and that an understanding of the special grants program may shed light on the decline of science at the USDA and Congress's reluctance to increase agricultural research funding.

Earmarking, distributive politics, path-dependence

Abstract:
While some argue that incomplete incentive contracts facilitate the self-enforcement of informal dealings, other authors submit that they substitute for or 'crowd out' social norms supporting informal arrangements. We use experimental evidence to test these theories by manipulating the extent to which individuals transact repeatedly and the level of contract costs. We find that, by enforcing contractible exchange dimensions, contracts facilitate the self-enforcement of noncontractible dimensions. This complementarity effect is particularly important when repetition is unlikely and thus self-enforcement is difficult. Although our data suggest the existence of reciprocity as an alternative, informal enforcement mechanism, we do not find evidence that contracts substitute for this social norm.

Abstract:
What is the origin of the structural independence of the Federal Reserve System? Unlike existing explanations on central bank independence, we show that the structural independence of the Fed is not the result of intentional design but a product of compromise among disparate groups. Using agenda-constrained ideal point estimation techniques to estimate both the preferences of senators on key questions of Fed structure and the locations of alternative forms of the bill with respect to those preferences, we show that the structural features of the Fed in the final bill differed markedly from the original preferences of legislators representing competing groups. The result was a compromise that offered the prospect of significant independence for the new agency. The Fed case shows that political compromise can provide useful bureaucratic insulation when the short-term incentives of political principals promote unstable, self-seeking policy choices.

Abstract:
The uncovered set has frequently been proposed as a solution concept for majority rule settings. This paper tests this proposition using a new technique for estimating uncovered sets and a series of experiments, including five-player computer-mediated experiments and 35-player paper-format experiments. The results support the theoretic appeal of the uncovered set. Outcomes overwhelmingly lie in or near the uncovered set. Furthermore, when preferences shift, outcomes track the uncovered set. Although outcomes tend to occur within the uncovered set, they are not necessarily stable; majority dominance relationships still produce instability, albeit constrained by the uncovered set.

Abstract:
Group decision making is commonly used in juries, businesses, and in politics to increase the informational basis for a decision and to improve decision accuracy. Recent work on generalizing Condercet's jury theorem provides a compelling justification for using groups in this manner. But these theories rely on a model of the individual as an optimal Bayesian decision maker. Do groups effectively aggregate information when the individuals are the flawed, non-Bayesian decision makers that actually populate acting groups? We first survey the evidence that individuals systematically violate Bayes' theorem under certain conditions. We then report two experiments designed to test whether individuals follow Bayesian reasoning and whether groups are able to overcome biased individual information processing. The experiments show that under certain conditions, with extreme probabilities and with signals that vary in diagnositicity, that individual accuracy actually deteriorates as information increases. For certain problems, majority rule effectively aggregates individual information. For the most difficult problems, majority rule fails to attenuate individual bias. The implications of these findings for research on individual and group judgment are discussed.

Jury Theorem, Bayes Theorem, Judgment Bias, Asymmetric Signals