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

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  • 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.

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Bibliographic 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:not:notcdx:2006-04

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Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
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Web page: http://www.nottingham.ac.uk/economics/cedex/
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Keywords: Classroom experiments; post-contractual opportunism; incentive contracts; efficiency; reciprocity; Coase theorem;

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  1. Anderhub, Vital & Gächter, Simon & Königstein, Manfred, 1999. "Efficient contracting and fair play in a simple principal-agent experiment," SFB 373 Discussion Papers 1999,82, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Ernst Fehr & Simon G�chter, 2000. "Fairness and Retaliation: The Economics of Reciprocity," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 159-181, Summer.
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