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Design a Contract! A Simple Principal-Agent Problem as a Classroom Experiment

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Author Info
Simon Gaechter () (University of Nottingham)
Manfred Koenigstein () (University of Erfurt)

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Abstract

We present a simple classroom principal-agent experiment that can effectively be used as a teaching device to introduce important concepts of organizational economics and contracting. In a first part, students take the role of a principal and design a contract that consists of a fixed payment and an incentive component. In the second part, students take the role of agents and decide on an effort level. The experiment can be used to introduce students to the concepts of efficiency, incentive compatibility, outside options and participation constraints, the Coase theorem, and fairness and reciprocity in contracting.

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Publisher Info
Paper provided by The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham in its series Discussion Papers with number 2006-04.

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Date of creation: Apr 2006
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Handle: RePEc:cdx:dpaper:2006-04

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Related research
Keywords: Classroom experiments post-contractual opportunism incentive contracts efficiency reciprocity Coase theorem

Find related papers by JEL classification:
A22 - General Economics and Teaching - - Economics Education and Teaching of Economics - - - Undergraduate
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

This paper has been announced in the following NEP Reports:

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.:
  1. Ernst Fehr & Simon Gaechter, . "Fairness and Retaliation: The Economics of Reciprocitys," IEW - Working Papers iewwp040, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  2. Camerer, Colin F & Thaler, Richard H, 1995. "Ultimatums, Dictators and Manners," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 209-19, Spring. [Downloadable!] (restricted)
  3. Manfred Königstein, 2001. "Optimal Contracting With Boundedly Rational Agents," Homo Oeconomicus, Institute of SocioEconomics, vol. 18, pages 211-228.
  4. Guth, Werner, 1995. "On ultimatum bargaining experiments -- A personal review," Journal of Economic Behavior & Organization, Elsevier, vol. 27(3), pages 329-344, August. [Downloadable!] (restricted)
  5. 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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