Advanced Search
MyIDEAS: Login to save this paper or follow this series

Optimal Contracts With Team Production And Hidden Information: An Experiment

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.escholarship.org/uc/item/3bb3p3t3.pdf;origin=repeccitec
Download Restriction: no

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.

as in new window
Length:
Date of creation: 01 Mar 2008
Date of revision:
Handle: RePEc:cdl:ucsbec:qt3bb3p3t3

Contact details of provider:
Postal: 2127 North Hall, Santa Barbara, CA 93106-9210
Phone: (805) 893-3670
Fax: (805) 893-8830
Web page: http://www.escholarship.org/repec/ucsbecon_dwp/
More information through EDIRC

Related research

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

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Ellison, Glenn & Fudenberg, Drew, 1993. "Rules of Thumb for Social Learning," Scholarly Articles 3196332, Harvard University Department of Economics.
  2. Gary Charness & Martin Dufwenberg, 2004. "Promises and Partnership," Levine's Bibliography 122247000000000001, UCLA Department of Economics.
  3. Charness, Gary & Rabin, Matthew, 2002. "Understanding Social Preferences with Simple Tests," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt3d04q5sm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Bull, Clive & Schotter, Andrew & Weigelt, Keith, 1985. "Tournaments and Piece Rates: An Experimental Study," Working Papers, C.V. Starr Center for Applied Economics, New York University 85-21, C.V. Starr Center for Applied Economics, New York University.
  5. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061937, December.
  6. Charness, Gary & Corominas-Bosch, Margarida & Frechette, Guillaume R., 2007. "Bargaining and network structure: An experiment," Journal of Economic Theory, Elsevier, Elsevier, vol. 136(1), pages 28-65, September.
  7. Bo\u{g}açhan Çelen & Shachar Kariv & Andrew Schotter, 2010. "An Experimental Test of Advice and Social Learning," Management Science, INFORMS, INFORMS, vol. 56(10), pages 1687-1701, October.
  8. Fehr, Ernst & Schmidt, Klaus M., . "A theory of fairness, competition, and cooperation," Chapters in Economics, University of Munich, Department of Economics, University of Munich, Department of Economics.
  9. Ananish Chaudhuri & Sara Graziano & Pushkar Maitra, 2006. "Social Learning and Norms in a Public Goods Experiment with Inter-Generational Advice -super-1," Review of Economic Studies, Oxford University Press, Oxford University Press, vol. 73(2), pages 357-380.
  10. Catherine Eckel & Rick Wilson, 2007. "Social learning in coordination games: does status matter?," Experimental Economics, Springer, Springer, vol. 10(3), pages 317-329, September.
  11. Keser, Claudia & Willinger, Marc, 2000. "Principals' principles when agents' actions are hidden," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 18(1), pages 163-185, January.
  12. Ananish Chaudhuri, 1997. "The Ratchet Principle in a Principal Agent Game with Unknown Costs: An Experimental Analysis," Departmental Working Papers, Rutgers University, Department of Economics 199608, Rutgers University, Department of Economics.
  13. Dufwenberg, Martin & Lundholm, Michael, 1997. "Social Norms and Moral Hazard," Working Paper Series, Uppsala University, Department of Economics 1997:28, Uppsala University, Department of Economics.
  14. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 3(4), pages 367-388, December.
  15. Werner Güth & Manfred Königstein & Judit Kovács & Enikõ Zala-Mezõ, 2001. "Fairness Within Firms: The Case Of One Principal And Multiple Agents," Schmalenbach Business Review (sbr), LMU Munich School of Management, LMU Munich School of Management, vol. 53(2), pages 82-101, April.
  16. Ramon Casadesus-Masanell, 2004. "Trust in Agency," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 13(3), pages 375-404, 09.
  17. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195102680, October.
  18. Nalbantian, Haig R & Schotter, Andrew, 1997. "Productivity under Group Incentives: An Experimental Study," American Economic Review, American Economic Association, American Economic Association, vol. 87(3), pages 314-41, June.
  19. Schotter, Andrew & Sopher, Barry, 2007. "Advice and behavior in intergenerational ultimatum games: An experimental approach," Games and Economic Behavior, Elsevier, Elsevier, vol. 58(2), pages 365-393, February.
  20. William Vickrey, 1961. "Counterspeculation, Auctions, And Competitive Sealed Tenders," Journal of Finance, American Finance Association, American Finance Association, vol. 16(1), pages 8-37, 03.
  21. 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., John Wiley & Sons, Ltd., vol. 19(4-5), pages 327-341.
  22. Bentley MacLeod, 2001. "Optimal Contracting with Subjective Evaluation," Theory workshop papers, UCLA Department of Economics 357966000000000036, UCLA Department of Economics.
  23. David J. Cooper, 1999. "Gaming against Managers in Incentive Systems: Experimental Results with Chinese Students and Chinese Managers," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 781-804, September.
  24. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  25. T. Parker Ballinger & Michael G. Palumbo & Nathaniel T. Wilcox, 2003. "Precautionary saving and social learning across generations: an experiment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(490), pages 920-947, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2006. "Competition, Hidden Information and Efficiency: An Experiment," Post-Print, HAL halshs-00175051, HAL.
  2. Arce, Daniel G., 2013. "Principals’ preferences for agents with social preferences," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 90(C), pages 154-163.
  3. Antonio Cabrales & Gary Charness & Marie Villeval, 2011. "Hidden information, bargaining power, and efficiency: an experiment," Experimental Economics, Springer, Springer, vol. 14(2), pages 133-159, May.
  4. Hoppe, Eva I. & Schmitz, Patrick W., 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," MPRA Paper 44240, University Library of Munich, Germany.
  5. Kocher, Martin G. & Luhan, Wolfgang J. & Sutter, Matthias, 2012. "Testing a Forgotten Aspect of Akerlof's Gift Exchange Hypothesis: Relational Contracts with Individual and Uniform Wages," IZA Discussion Papers 6415, Institute for the Study of Labor (IZA).
  6. Hoppe, Eva I. & Schmitz, Patrick W., 2009. "Gathering Information before Signing a Contract: Experimental Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7252, C.E.P.R. Discussion Papers.
  7. Benndorf, Volker & Rau, Holger A., 2012. "Competition in the workplace: An experimental investigation," DICE Discussion Papers, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) 53, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cdl:ucsbec:qt3bb3p3t3. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lisa Schiff).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.