Contract Choice: Efficiency and Fairness in Revenue‐Sharing Contracts

25 Pages Posted: 31 Oct 2017

See all articles by Alexandros Karakostas

Alexandros Karakostas

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Axel Sonntag

Vienna Center for Experimental Economics; Institute for Advanced Studies (IHS)

Daniel John Zizzo

University of Queensland

Date Written: October 2017

Abstract

We present a simple principal–agent experiment in which the principals are allowed to choose between a revenue‐sharing, a bonus, and a trust contract, to offer to an agent. Our findings suggest that a large majority of experimental subjects choose the revenue‐sharing contract. This choice turns out to be not only the most efficient but also, at the same time, fair. Overall, the distribution of earnings is only mildly skewed towards the principal. We conclude that, under revenue‐sharing contracts, concerns for fairness can be closely associated with the use of monetary incentives.

Keywords: Bonus contract, incentive contract, lab experiment, moral hazard, trust

JEL Classification: C91, J41, M52

Suggested Citation

Karakostas, Alexandros and Sonntag, Axel and Zizzo, Daniel John, Contract Choice: Efficiency and Fairness in Revenue‐Sharing Contracts (October 2017). The Scandinavian Journal of Economics, Vol. 119, Issue 4, pp. 962-986, 2017. Available at SSRN: https://ssrn.com/abstract=3062309 or http://dx.doi.org/10.1111/sjoe.12200

Alexandros Karakostas (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Schloßplatz 4
Erlangen, Bavaria 91054
Germany

Axel Sonntag

Vienna Center for Experimental Economics ( email )

Oskar-Morgenstern-Platz 1
Vienna, Vienna 1090
Austria

HOME PAGE: http://axelsonntag.com

Institute for Advanced Studies (IHS) ( email )

Josefstädter Straße 39
1080 Vienna
Austria

HOME PAGE: http://insight-austria.ihs.ac.at

Daniel John Zizzo

University of Queensland ( email )

St Lucia QLD 4072, Australia
Brisbane, Queensland
Australia

HOME PAGE: http://www.danielzizzo.com

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