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The ratchet principle in a principal agent game with unknown costs: an experimental analysis

  • Chaudhuri, Ananish

In this paper we consider an experimental two-period game characterized by incomplete information.The agent produces an output for the principal and can have either high or low costs of production. The principal ex ante knows only that each is equally likely. The principal's aim is to extract the maximum possible surplus from the agent. The principal sets an output quota at the beginning of each period and does not commit to a long-term scheme and uses any information that becomes available about the agent's true type in setting next period's quota in order to extract the informational rent. We find that the agents play the game in a naive way - very often revealing their true types through their choices even though such type revelation is not optimal. However frequently the principal does not exploit this information in extracting more of the informational rent from the agent.

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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 37 (1998)
Issue (Month): 3 (November)
Pages: 291-304

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Handle: RePEc:eee:jeborg:v:37:y:1998:i:3:p:291-304
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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  1. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  2. Ruffle, Bradley J., 1998. "More Is Better, But Fair Is Fair: Tipping in Dictator and Ultimatum Games," Games and Economic Behavior, Elsevier, vol. 23(2), pages 247-265, May.
  3. Hoffman Elizabeth & McCabe Kevin & Shachat Keith & Smith Vernon, 1994. "Preferences, Property Rights, and Anonymity in Bargaining Games," Games and Economic Behavior, Elsevier, vol. 7(3), pages 346-380, November.
  4. Yun Joo Jung & John H. Kagel & Dan Levin, 1994. "On the Existence of Predatory Pricing: An Experimental Study of Reputation and Entry Deterrence in the Chain-Store Game," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 72-93, Spring.
  5. J. Ochs & Alvin E. Roth, 1998. "An experimental study of sequential bargaining," Levine's Working Paper Archive 331, David K. Levine.
  6. Neelin, Janet & Sonnenschein, Hugo & Spiegel, Matthew, 1988. "A Further Test of Noncooperative Bargaining Theory: Comment," American Economic Review, American Economic Association, vol. 78(4), pages 824-36, September.
  7. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
  8. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  9. Forsythe Robert & Horowitz Joel L. & Savin N. E. & Sefton Martin, 1994. "Fairness in Simple Bargaining Experiments," Games and Economic Behavior, Elsevier, vol. 6(3), pages 347-369, May.
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