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Contracting under Incomplete Information and Social Preferences: An Experimental Study

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  • Hoppe, Eva I.
  • Schmitz, Patrick W.

Abstract

Principal-agent models in which the agent has access to private information before a contract is signed are a cornerstone of contract theory. We have conducted an experiment with 720 participants to explore whether the theoretical insights are reflected by the behavior of subjects in the laboratory and to what extent deviations from standard theory can be explained by social preferences. Investigating settings with both exogenous and endogenous information structures, we find that agency theory is indeed useful to qualitatively predict how variations in the degree of uncertainty affect subjects' behavior. Regarding the quantitative deviations from standard predictions, our analysis based on several control treatments and quantal response estimations shows that agents' behavior can be explained by social preferences that are less pronounced than in conventional ultimatum games. Principals' own social preferences are not an important determinant of their behavior. However, when the principals make contract offers, they anticipate that social preferences affect agents' behavior.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44240.

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Date of creation: Jan 2013
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Handle: RePEc:pra:mprapa:44240

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Keywords: Agency theory; Adverse selection; Information gathering; Ultimatum game; Social preferences; Experiment;

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Cited by:
  1. Werner Güth & M. Vittoria Levati & Chiara Nardi & Ivan Soraperra, 2014. "An ultimatum game with multidimensional response strategies," Jena Economic Research Papers, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics 2014-018, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  2. Ola Andersson & Håkan J. Holm & Jean-Robert Tyran & Erik Wengström, 2013. "Deciding for Others Reduces Loss Aversion," Discussion Papers 13-09, University of Copenhagen. Department of Economics.

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