Optimal Contracts with Team Production and Hidden Information: An Experiment

Universitat Pompeu Fabra Working Paper No. 478

41 Pages Posted: 20 Sep 2000 Last revised: 14 Jun 2010

See all articles by Antonio Cabrales

Antonio Cabrales

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Gary Charness

University of California, Santa Barbara (UCSB) - Department of Economics

Date Written: April 18, 2003

Abstract

It is standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. Yet it may be useful to consider social forces in mechanism design and contract theory. We devise an experiment to explore optimal contracts in a hidden information context. A principal offers one of three possible contract menus to a team of two agents of unknown types. We observe numerous rejections of the more lopsided menus, and approach an equilibrium where one of the more equitable menus is proposed and agents accept a contract, selecting actions according to their types. The consensus menu differs across treatments that vary the payoffs resulting from a rejection. We find that an agent is more likely to reject a contract menu if her teammate rejected a contract menu in the previous period, suggesting that agents may be learning social norms; in addition, low-ability agents have a particularly adverse reaction to reduced wage offers.

Keywords: Experiment, Hidden Information, Optimal contract, Production Team, Wage Rigidity

JEL Classification: A13, B49, C91, C92, D21, J41

Suggested Citation

Cabrales, Antonio and Charness, Gary, Optimal Contracts with Team Production and Hidden Information: An Experiment (April 18, 2003). Universitat Pompeu Fabra Working Paper No. 478. Available at SSRN: https://ssrn.com/abstract=235667 or http://dx.doi.org/10.2139/ssrn.235667

Antonio Cabrales (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 27 65 (Phone)
(34-93) 542 17 46 (Fax)

Gary Charness

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States
805-893-2412 (Phone)
805-893-8830 (Fax)

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