Fair Offers in a Repeated Principal-Agent Relationship with Hidden Actions

Abstract

We test a repeated principal-agent relationship with hidden actions in the laboratory. At each period, the principal offers payments to the agent in order to induce him to provide the high effort level. The agent can accept or reject the offer; if he accepts it, he can choose the high or the low effort level. We observe that offered payments are higher than predicted by the subgame-perfect equilibrium, and higher in the partners' than in the strangers' design. Furthermore, agents strategically reject inequitable offers in early rounds in order to induce principals to increase payments in the subsequent rounds.