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Contract Choice: Efficiency and Fairness in Revenue‐Sharing Contracts

Author

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  • Alexandros Karakostas
  • Axel Sonntag
  • Daniel John Zizzo

Abstract

We present a simple principal–agent experiment in which the principals are allowed to choose between a revenue‐sharing, a bonus, and a trust contract, to offer to an agent. Our findings suggest that a large majority of experimental subjects choose the revenue‐sharing contract. This choice turns out to be not only the most efficient but also, at the same time, fair. Overall, the distribution of earnings is only mildly skewed towards the principal. We conclude that, under revenue‐sharing contracts, concerns for fairness can be closely associated with the use of monetary incentives.

Suggested Citation

  • Alexandros Karakostas & Axel Sonntag & Daniel John Zizzo, 2017. "Contract Choice: Efficiency and Fairness in Revenue‐Sharing Contracts," Scandinavian Journal of Economics, Wiley Blackwell, vol. 119(4), pages 962-986, October.
    • Handle: RePEc:bla:scandj:v:119:y:2017:i:4:p:962-986
    DOI: 10.1111/sjoe.12200
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    Cited by:

    1. Alexandros Karakostas & Martin G. Kocher & Dominik Matzat & Holger A. Rau & Gerhard Riewe, 2021. "The Team Allocator Game: Allocation Power in Public Goods Games," CESifo Working Paper Series 9023, CESifo.
    2. Daniela Di Cagno & Lorenzo Ferrari & Werner Güth & Vittorio Larocca, 2021. "Transparent Dealing instead of Insider Haggling - Experimentally Analyzing an Institutional Choice for Repeated Trade," CEIS Research Paper 523, Tor Vergata University, CEIS, revised 18 Feb 2023.
    3. Miguel A. Fonseca & Ricardo Gonçalves & Joana Pinho & Giovanni Tabacco, 2020. "Cartel deterrence and manager labor market in US and EU antitrust jurisdictions: theory and experimental data," Working Papers de Economia (Economics Working Papers) 02, Católica Porto Business School, Universidade Católica Portuguesa.
    4. Fonseca, Miguel A. & Gonçalves, Ricardo & Pinho, Joana & Tabacco, Giovanni A., 2022. "How do antitrust regimes impact on cartel formation and managers’ labor market? An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 643-662.
    5. Jiang, Jiang & Li, Sherry Xin, 2019. "Group identity and partnership," Journal of Economic Behavior & Organization, Elsevier, vol. 160(C), pages 202-213.
    6. Subhasish M. Chowdhury & Alexandros Karakostas, 2020. "An experimental investigation of the ‘tenuous trade-off’ between risk and incentives in organizations," Theory and Decision, Springer, vol. 88(1), pages 153-190, February.
    7. Fuqiang Lu & Liying Wang & Hualing Bi & Zichao Du & Suxin Wang, 2021. "An Improved Revenue Distribution Model for Logistics Service Supply Chain Considering Fairness Preference," Sustainability, MDPI, vol. 13(12), pages 1-30, June.
    8. Kenju Kamei, 2021. "Incomplete Political Contracts with Secret Ballots: Reciprocity as a Force to Enforce Sustainable Clientelistic Relationships," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 37(2), pages 392-439.
    9. Sonntag, Axel & Zizzo, Daniel John, 2019. "Personal accountability and cooperation in teams," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 428-448.

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