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Optimal contracts with team production and hidden information: An experiment

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  • Cabrales, Antonio
  • Charness, Gary

Abstract

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 skill levels, with both agents' participation needed for production. We observe numerous rejections of the more lopsided menus, and principals respond by offering more favorable menus. Apart from rejections, we see almost complete separation in agent choices according to the agent types. Behavior converges towards a consensus in which one of the more equitable menus is proposed and agents accept a contract. The consensus menu differs across two treatments in which we vary the payoffs resulting from a rejection. We find strong evidence of social learning by low-skill agents (but only for low-skilled agents), in that a low-skill agent is more likely to reject a contract menu if her teammate rejected a contract menu in the previous period. In addition, low-skilled agents have a particularly adverse reaction to reduced wage offers.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 77 (2011)
Issue (Month): 2 (February)
Pages: 163-176

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Handle: RePEc:eee:jeborg:v:77:y:2011:i:2:p:163-176

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Web page: http://www.elsevier.com/locate/jebo

Related research

Keywords: Experiment Hidden information Optimal contract Production team Wage rigidity;

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References

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Citations

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Cited by:
  1. Cabrales, Antonio & Charness, Gary & Villeval, Marie Claire, 2006. "Competition, Hidden Information and Efficiency: An Experiment," IZA Discussion Papers 2296, Institute for the Study of Labor (IZA).
  2. Hoppe, Eva I. & Schmitz, Patrick W., 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," MPRA Paper 44240, University Library of Munich, Germany.
  3. Kocher, Martin G. & Luhan, Wolfgang J. & Sutter, Matthias, 2012. "Testing a Forgotten Aspect of Akerlof's Gift Exchange Hypothesis: Relational Contracts with Individual and Uniform Wages," IZA Discussion Papers 6415, Institute for the Study of Labor (IZA).
  4. Hoppe, Eva I. & Schmitz, Patrick W., 2009. "Gathering Information before Signing a Contract: Experimental Evidence," CEPR Discussion Papers 7252, C.E.P.R. Discussion Papers.
  5. Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2011. "Hidden Information, Bargaining Power, And Efficiency: An Experiment," Post-Print halshs-00614472, HAL.
  6. Benndorf, Volker & Rau, Holger A., 2012. "Competition in the workplace: An experimental investigation," DICE Discussion Papers 53, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  7. Arce, Daniel G., 2013. "Principals’ preferences for agents with social preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 154-163.

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