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Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment

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Author Info
Vital Anderhub ()
Simon Gächter ()
Manfred Königstein ()

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Abstract

We study behavior within a simple principal-agent experiment. Our design allows for a large class of linear contracts. Principals can offer any feasible combination of (negative) fixed wages and incentives in the form of return sharing. This great contractual flexibility allows us to study incentive compatibility simultaneously with issues of 'fair sharing' and reciprocity, which were previously found to be important. We find a high degree of incentive-compatible behavior, but also 'fair sharing' and reciprocity. In contrast to other incentive devices studied in the literature, the incentives are 'reciprocity-compatible'. Principals recognize the agency problem and react accordingly. Copyright Kluwer Academic Publishers 2002

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File URL: http://hdl.handle.net/10.1023/A:1016380207200
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Publisher Info
Article provided by Springer in its journal Experimental Economics.

Volume (Year): 5 (2002)
Issue (Month): 1 (June)
Pages: 5-27
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Handle: RePEc:kap:expeco:v:5:y:2002:i:1:p:5-27

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Web page: http://www.springerlink.com/link.asp?id=102888

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Related research
Keywords: principal-agent theory contract theory fair sharing incentive contracts reciprocity experiments

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1987. "Tournaments and Piece Rates: An Experimental Study," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 1-33, February. [Downloadable!] (restricted)
    Other versions:
  2. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March. [Downloadable!] (restricted)
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  3. Camerer, Colin, et al, 1997. "Labor Supply of New York City Cabdrivers: One Day at a Time," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 407-41, May.
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  4. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter. [Downloadable!] (restricted)
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  6. Ernst Fehr & Simon Gachter & Georg Kirchsteiger, 1997. "Reciprocity as a Contract Enforcement Device: Experimental Evidence," Econometrica, Econometric Society, vol. 65(4), pages 833-860, July.
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  9. Werner Güth & Wolfgang Klose & Manfred Königstein & Joachim Schwalbach, 1998. "An experimental study of a dynamic principal-agent relationship," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 327-341.
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  15. Robert Slonim & Alvin E. Roth, 1998. "Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic," Econometrica, Econometric Society, vol. 66(3), pages 569-596, May.
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  17. Berg, Joyce E, et al, 1986. "Controlling Preferences for Lotteries on Units of Experimental Exchange," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 281-306, May. [Downloadable!] (restricted)
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  19. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March. [Downloadable!] (restricted)
  20. Hackett, Steven C, 1993. "Incomplete Contracting: A Laboratory Experimental Analysis," Economic Inquiry, Oxford University Press, vol. 31(2), pages 274-97, April.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Charness, Gary & Dufwenberg, Martin, 2003. "Promises & Partnership," Research Papers in Economics 2003:3, Stockholm University, Department of Economics. [Downloadable!]
  2. Dennis Dittrich & Martin G. Kocher, 2006. "Monitoring and Pay: An Experiment on Employee Performance under Endogenous Supervision," Tinbergen Institute Discussion Papers 06-098/1, Tinbergen Institute. [Downloadable!]
    Other versions:
  3. Ernst Fehr & Klaus M. Schmidt, . "Fairness and Incentives in a Multi-Task Principal-Agent Model," IEW - Working Papers iewwp191, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  4. Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2006. "Competition, Hidden Information, and Efficiency: an Experiment," Working Papers 0605, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]
    Other versions:
  5. Gary Charness & Martin Dufwenberg, 2004. "Promises and Partnership," Levine's Bibliography 122247000000000001, UCLA Department of Economics. [Downloadable!]
    Other versions:
  6. Ernst Fehr & Alexander Klein & Klaus Schmidt, 2004. "Contracts, Fairness, and Incentives," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  7. Ernst Fehr & Alexander Klein & Klaus M. Schmidt, 2005. "Fairness and Contract Design," Discussion Papers 67, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
    Other versions:
  8. Simon Gaechter & Manfred Koenigstein, 2006. "Design a Contract! A Simple Principal-Agent Problem as a Classroom Experiment," Discussion Papers 2006-04, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham. [Downloadable!]
  9. Marco van Herpen & C. Mirjam van Praag & Kees Cools, 2003. "The Effects of Performance Measurement and Compensation on Motivation," Tinbergen Institute Discussion Papers 03-048/3, Tinbergen Institute. [Downloadable!]
  10. Dittrich, Dennis & Kocher, Martin, 2006. "Monitoring and Pay: An Experiment on Employee under Endogenous Supervision," CEPR Discussion Papers 5962, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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