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Contract design in dynamic agency: An experimental analysis

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  • Christian Lukas

Abstract

This paper reports results from an experiment studying contract design in a dynamic 2‐period agency relationship with unobservable effort. A deferred compensation contract is theoretically optimal—it places all incentives on the outcomes in the second period. Observed contract choices offer a substantial part of the incentives for the high outcome in the first period suggesting a strong preference for timely rewards. Information about theoretically optimal bonuses and effort decisions shifts contract choices towards a deferred compensation contract. This contract structure is more profitable for principal participants.

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  • Christian Lukas, 2017. "Contract design in dynamic agency: An experimental analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 38(8), pages 1216-1226, December.
    • Handle: RePEc:wly:mgtdec:v:38:y:2017:i:8:p:1216-1226
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    1. Nieken, Petra & Schmitz, Patrick W., 2012. "Repeated moral hazard and contracts with memory: A laboratory experiment," Games and Economic Behavior, Elsevier, vol. 75(2), pages 1000-1008.
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    5. Steffen Huck & Andrew J. Seltzer & Brian Wallace, 2011. "Deferred Compensation in Multiperiod Labor Contracts: An Experimental Test of Lazear's Model," American Economic Review, American Economic Association, vol. 101(2), pages 819-843, April.
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    1. Linshu Qiu & Dongxiao Yang & Kairong Hong, 2023. "Multidimensional Preference Game and Extreme Dispute Resolution for Optimal Compensation of House Expropriation," Mathematics, MDPI, vol. 11(11), pages 1-20, May.

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