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Optimal Contracts With Team Production And Hidden Information: An Experiment

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  • Charness, Gary B
  • Cabrales, Antonio

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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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt3bb3p3t3.

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Date of creation: 01 Mar 2008
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Handle: RePEc:cdl:ucsbec:qt3bb3p3t3

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

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Cited by:
  1. Benndorf, Volker & Rau, Holger A., 2012. "Competition in the workplace: An experimental investigation," DICE Discussion Papers 53, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  2. Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2006. "Competition, Hidden Information and Efficiency: An Experiment," Post-Print halshs-00175051, HAL.
  3. Martin G. Kocher & Wolfgang J. Luhan & Matthias Sutter, 2012. "Testing a forgotten aspect of Akerlof’s gift exchange hypothesis: Relational contracts with individual and uniform wages," Working Papers 2012-02, Faculty of Economics and Statistics, University of Innsbruck.
  4. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1516-1544.
  5. Gary Charness & Marie Claire Villeval & Antonio Cabrales, 2009. "Hidden Information, Bargaining Power and Efficiency: An Experiment," Working Papers 2009-08, FEDEA.
  6. Arce, Daniel G., 2013. "Principals’ preferences for agents with social preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 154-163.
  7. Hoppe, Eva I. & Schmitz, Patrick W., 2009. "Gathering Information before Signing a Contract: Experimental Evidence," CEPR Discussion Papers 7252, C.E.P.R. Discussion Papers.

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