Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment
Institute for Empirical Research in Economics Working Paper No. 18
42 Pages Posted: 20 Feb 2000
Date Written: October 2001
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, C91
Suggested Citation: Suggested Citation