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Recursive contracts, firm longevity, and rat races: An experimental analysis

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  • Bardsley, Peter
  • Erkal, Nisvan
  • Nikiforakis, Nikos
  • Wilkening, Tom

Abstract

This paper reports the results from a laboratory experiment which investigates the structure of contracts that emerge in overlapping-generation firms where future ownership is a perquisite of employment. Workers in the young generation are offered employment contracts designed by the firms' owners who belong to the old generation. When old, employed workers are granted ownership rights as long as the firm continues to operate. In line with theoretical predictions, the results indicate that as firm longevity increases, the recursive nature of the contracts leads to a rat race characterized by low wages, high effort levels, and rent dissipation. These results have important implications for the optimal management of long-lived firms such as partnerships.

Suggested Citation

  • Bardsley, Peter & Erkal, Nisvan & Nikiforakis, Nikos & Wilkening, Tom, 2013. "Recursive contracts, firm longevity, and rat races: An experimental analysis," European Economic Review, Elsevier, vol. 61(C), pages 217-231.
    • Handle: RePEc:eee:eecrev:v:61:y:2013:i:c:p:217-231
    DOI: 10.1016/j.euroecorev.2013.03.009
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    More about this item

    Keywords

    Overlapping-generations models; Recursive contracts; Rat races; Experiments;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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