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

Principal-Agent Settings with Random Shocks

Contents:

Author Info

  • Jared Rubin

    (Argyros School of Business and Economics, Chapman University)

  • Roman Sheremeta

    ()
    (Argyros School of Business and Economics, Chapman University)

Abstract

Using a gift exchange experiment, we show that the ability of reciprocity to overcome incentive problems inherent in principal-agent settings is greatly reduced when the agent’s effort is distorted by random shocks and transmitted imperfectly to the principal. Specifically, we find that gift exchange contracts without shocks encourage effort and wages well above standard predictions. However, the introduction of random shocks reduces wages and effort, regardless of whether the shocks can be observed by the principal. Moreover, the introduction of shocks significantly reduces the probability of fulfilling the contract by the agent, the payoff of the principal, as well as total welfare.

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.chapman.edu/research-and-institutions/economic-science-institute/_files/WorkingPapers/rubin-sheremeta-principle-agent-setting-with-random-shocks.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 12-21.

as in new window
Length: 40 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:chu:wpaper:12-21

Contact details of provider:
Postal: One University Drive, Orange, CA 92866
Phone: (714) 628-2830
Fax: (714) 628-2881
Email:
Web page: http://www.chapman.edu/esi/
More information through EDIRC

Related research

Keywords: gift exchange; principal-agent model; contract theory; reciprocity; effort; shocks; laboratory experiment;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

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. Bellemare, Charles & Kröger, Sabine, 2003. "On Representative Trust," SFB 373 Discussion Papers 2003,24, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Cappelen, Alexander W. & Konow, James & Sørensen, Erik Ø. & Tungodden, Bertil, 2010. "Just Luck: An Experimental Study of Risk Taking and Fairness," Discussion Paper Series in Economics 4/2010, Department of Economics, Norwegian School of Economics.
  3. James Andreoni & William Harbaugh & Lise Vesterlund, 2003. "The Carrot or the Stick: Rewards, Punishments, and Cooperation," American Economic Review, American Economic Association, vol. 93(3), pages 893-902, June.
  4. Martin Sefton & Robert Shupp & James M. Walker, 2006. "The Effect of Rewards and Sanctions in Provision of Public Goods," Caepr Working Papers 2006-005, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington, revised Aug 2006.
  5. Bjorn Bartling & Ernst Fehr & Klaus M. Schmidt, 2012. "Screening, Competition, and Job Design: Economic Origins of Good Jobs," American Economic Review, American Economic Association, vol. 102(2), pages 834-64, April.
  6. Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
  7. Charles Bellemare & Sabine Kroger, 2005. "On Representative Social Capital," Cahiers de recherche 0504, CIRPEE.
  8. Daniel Houser & Erte Xiao & Kevin McCabe & Vernon Smith, 2005. "When Punishment Fails: Research on Sanctions, Intentions and Non- Cooperation," Experimental 0502001, EconWPA, revised 18 Feb 2005.
  9. Nisvan Erkal & Lata Gangadharan & Nikos Nikiforakis, 2011. "Relative Earnings and Giving in a Real-Effort Experiment," American Economic Review, American Economic Association, vol. 101(7), pages 3330-48, December.
  10. Steven Shavell, 1979. "Risk Sharing and Incentives in the Principal and Agent Relationship," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 55-73, Spring.
  11. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
Full references (including those not matched with items on IDEAS)

Citations

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:chu:wpaper:12-21. 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: (Megan Luetje).

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.