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Optimal Contracts With Team Production And Hidden Information: An Experiment

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Author Info
Gary Charness (University of California, Santa Barbara)
Antonio Cabrales (Universidad Carlos III de Madrid)

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Abstract

It is standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. Yet it may be useful to consider social forces in mechanism design and contract theory. 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 types. We observe numerous rejections of the more lopsided menus, and approach an equilibrium where one of the more equitable menus is proposed and agents accept a contract, selecting actions according to their types. The consensus menu differs across treatments that vary the payoffs resulting from a rejection. We find that an agent is more likely to reject a contract menu if her teammate rejected a contract menu in the previous period, suggesting that agents may be learning social norms; in addition, low-ability agents have a particularly adverse reaction to reduced wage offers.

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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number 12-08.

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Date of creation: 01 Mar 2008
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Handle: RePEc:cdl:ucsbec:12-08

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Related research
Keywords: Experiment; Hidden Information; Optimal contract; Production Team; Wage Rigidity;

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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.:
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  2. Gary Charness & Matthew Rabin, 2002. "Understanding Social Preferences With Simple Tests," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 817-869, August. [Downloadable!] (restricted)
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  3. Keser, Claudia & Willinger, Marc, 2000. "Principals' principles when agents' actions are hidden," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 163-185, January. [Downloadable!] (restricted)
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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. 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!]
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  2. Sandra Maximiano & Randolph Sloof & Joep Sonnemans, 2004. "Gift Exchange in a Multi-worker Firm," Tinbergen Institute Discussion Papers 04-100/1, Tinbergen Institute. [Downloadable!]
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