Bounded Rationality in Principal‐Agent Relationships
AbstractWe conducted six treatments of a standard moral hazard experiment with hidden action. All treatments had identical Nash equilibria. However, the behavior in all treatments and periods was inconsistent with established agency theory (Nash equilibrium). In the early periods of the experiment, behavior differed significantly between treatments. This difference largely vanished in the final periods. We used logit equilibrium (LE) as a device to grasp boundedly rational behavior and found the following: (1) LE predictions are much closer to subjects’ behavior in the laboratory; (2) LE probabilities of choosing between strategies and experimental behavior show remarkably similar patterns; and (3) profit‐maximizing contract offers according to the LE are close to those derived from regressions.
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Bibliographic InfoPaper provided by Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal) in its series TUC Working Papers in Economics with number 0006.
Length: 25 pages
Date of creation: 2012
Date of revision:
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experiment; logit equilibrium; moral hazard; hidden action;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-01 (All new papers)
- NEP-CBE-2012-02-01 (Cognitive & Behavioural Economics)
- NEP-CTA-2012-02-01 (Contract Theory & Applications)
- NEP-EVO-2012-02-01 (Evolutionary Economics)
- NEP-EXP-2012-02-01 (Experimental Economics)
- NEP-GTH-2012-02-01 (Game Theory)
- NEP-HPE-2012-02-01 (History & Philosophy of Economics)
- NEP-UPT-2012-02-01 (Utility Models & Prospect Theory)
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