Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment
Humboldt University of Berlin - Faculty of Economics
CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
University of Erfurt; Institute for the Study of Labor (IZA)
Experimental Economics, Forthcoming
We study behavior within a simple principal-agent experiment. Our design allows for a large class of linear contracts. Principals can offer any feasible combination of (negative) fixed wages and incentives in the form of return sharing. This great contractual flexibility allows us to study incentive compatibility simultaneously with issues of 'fair sharing' and reciprocity, which were previously found to be important. We find a high degree of incentive-compatible behavior, but also 'fair sharing' and reciprocity. In contrast to other incentive devices studied in the literature, the incentives are 'reciprocity-compatible'. Principals recognize the agency problem and react accordingly.
Keywords: Principal-agent theory, contract theory, fair sharing, incentive contracts, reciprocity, experiments
JEL Classification: J33, J41, L14, C91Accepted Paper Series
Date posted: July 15, 2002
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