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

Author

Listed:
  • Simon Gaechter

    (University of Nottingham)

  • Manfred Koenigstein

    (University of Erfurt)

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.

Suggested Citation

  • Simon Gaechter & Manfred Koenigstein, 2006. "Design a Contract! A Simple Principal-Agent Problem as a Classroom Experiment," Discussion Papers 2006-04, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    • Handle: RePEc:not:notcdx:2006-04
    as

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    File URL: https://www.nottingham.ac.uk/cedex/documents/papers/2006-04.pdf
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    References listed on IDEAS

    as
    1. Ernst Fehr & Simon Gächter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
    2. Manfred K÷nigstein, 2001. "Optimal Contracting With Boundedly Rational Agents," Homo Oeconomicus, Institute of SocioEconomics, vol. 18, pages 211-228.
    3. Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer;Economic Science Association, vol. 5(1), pages 5-27, June.
    4. Colin F. Camerer & Richard H. Thaler, 1995. "Anomalies: Ultimatums, Dictators and Manners," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 209-219, Spring.
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    Cited by:

    1. Sascha Füllbrunn & Tibor Neugebauer, 2013. "Limited Liability, Moral Hazard, And Risk Taking: A Safety Net Game Experiment," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1389-1403, April.
    2. Gerald Eisenkopf & Pascal A. Sulser, 2016. "Randomized controlled trial of teaching methods: Do classroom experiments improve economic education in high schools?," The Journal of Economic Education, Taylor & Francis Journals, vol. 47(3), pages 211-225, July.

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    More about this item

    Keywords

    Classroom experiments; post-contractual opportunism; incentive contracts; efficiency; reciprocity; Coase theorem;
    All these keywords.

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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