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The effect of random shocks on reciprocal behavior in dynamic principal-agent settings

Author

Listed:
  • Rudolf Kerschbamer

    (University of Innsbruck)

  • Regine Oexl

    (University of Innsbruck)

Abstract

Previous work has shown that unobservable random shocks on output have a detrimental effect on efficiency in short-term (‘static’) employment relationships. Given the prevalence of long-term (‘dynamic’) relationships in firms, we investigate whether the impact of shocks is similarly pronounced in gift-exchange relationships where the same principal-agent pair interacts repeatedly. In dynamic relationships, shocks have a significantly less pronounced negative effect on efficiency than in static relationships. In an attempt to identify the drivers for our results we find that the combination of a repeated-game effect (current misbehavior can be punished in future periods) and a noise-canceling effect (part of the noise cancels out in the long run) is required to avoid the detrimental effects of unobservable random shocks on efficiency.

Suggested Citation

  • Rudolf Kerschbamer & Regine Oexl, 2023. "The effect of random shocks on reciprocal behavior in dynamic principal-agent settings," Experimental Economics, Springer;Economic Science Association, vol. 26(2), pages 468-488, April.
    • Handle: RePEc:kap:expeco:v:26:y:2023:i:2:d:10.1007_s10683-022-09771-w
    DOI: 10.1007/s10683-022-09771-w
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    More about this item

    Keywords

    Gift exchange; Principal agent model; Incomplete contracts; Random shocks; Reciprocity; Laboratory experiments; Long-term contracts;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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