Design a Contract! A Simple Principal-Agent Problem as a Classroom Experiment

15 Pages Posted: 5 Apr 2006

See all articles by Simon Gaechter

Simon Gaechter

University of Nottingham; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Manfred Königstein

University of Erfurt

Date Written: March 15, 2006

Abstract

We present a simple classroom principal-agent experiment that can effectively be used as a teaching device to introduce important concepts of organizational economics and contracting. In a first part, students take the role of a principal and design a contract that consists of a fixed payment and an incentive component. In the second part, students take the role of agents and decide on an effort level. The experiment can be used to introduce students to the concepts of efficiency, incentive compatibility, outside options and participation constraints, the Coase theorem, and fairness and reciprocity in contracting.

Keywords: Classroom, experiments, post-contractual opportunism, incentive contracts, efficiency, reciprocity, Coase theorem

JEL Classification: A22, C92

Suggested Citation

Gachter, Simon and Königstein, Manfred, Design a Contract! A Simple Principal-Agent Problem as a Classroom Experiment (March 15, 2006). Available at SSRN: https://ssrn.com/abstract=894350 or http://dx.doi.org/10.2139/ssrn.894350

Simon Gachter (Contact Author)

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Manfred Königstein

University of Erfurt ( email )

Internationales Buro
Nordhaeuser Str. 63
D - 99089 Erfurt
Germany

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