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An experimental study of a dynamic principal-agent relationship

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Author Info
Werner Güth (Humboldt-University Berlin, Department of Economics and Business Administration, Berlin, Germany)
Wolfgang Klose (Humboldt-University Berlin, Department of Economics and Business Administration, Berlin, Germany)
Manfred Königstein (Humboldt-University Berlin, Department of Economics and Business Administration, Berlin, Germany)
Joachim Schwalbach (Humboldt-University Berlin, Department of Economics and Business Administration, Berlin, Germany)
Abstract

The principal-agent problem is often illustrated by the relationship between owners and managers in modern corporations. Our experimental study considers the problem where the owner has to motivate the manager by an employment contract serving the owner'rsquo;s interest. The contract specifies a salary and a share of the firm'rsquo;s profit which depends on the manager'rsquo;s effort and stochastic market events. The owner can only infer the firm'rsquo;s profitability from the dividend payments. The owner may terminate or change the incentive contract in later periods. The experiment relies on a parameter specification for which risk neutral participants would cooperate efficiently, i.e. the owner should design a contract rendering full effort as optimal. However, we observe contracts for which full effort is not optimal and effort choices which are not optimal. We observe trust and reciprocity as important features of behavior which evolve over a multiperiod principal-agent relationship, but do not carry over to the next game with a new partner. © 1998 John Wiley & Sons, Ltd.

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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 19 (1998)
Issue (Month): 4-5 ()
Pages: 327-341
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:wly:mgtdec:v:19:y:1998:i:4-5:p:327-341

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  2. Simon Gaechter & Armin Falk, 2001. "Reputation or Reciprocity? An Experimental Investigation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Manfred Königstein & Gabriele K. Ruchala, 2007. "Performance Pay, Group Selection and Group Performance," IZA Discussion Papers 2697, Institute for the Study of Labor (IZA). [Downloadable!]
  4. Wijk, R.A.J.L. van & Bosch, F.A.J. van den & Volberda, H.W. & Heinhuis, S.M., 2005. "Reciprocity of Knowledge Flows in Internal Network Forms of Organizing," Research Paper ERS-2005-024-STR Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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  10. W. Güth & M. Königstein & N. Marchand & K. Nehring, . "Trust and Reciprocity in the Investment Game with Indirect Reward," Sonderforschungsbereich 373 2000-110, Humboldt Universitaet Berlin.
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  12. Claudia Keser & Marc Willinger, 2002. "Theories Of Behavior In Principal-Agent Relationships With Hidden Action," Working Papers of BETA 2002-07, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
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  14. 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!]
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  17. Antonio Cabrales & Gary Charness, 2000. "Optimal Contracts, Adverse Selection, and Social Preferences: An Experiment," Economics Working Papers 478, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  19. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer, vol. 5(1), pages 5-27, June. [Downloadable!] (restricted)
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