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Optimal contracts with team production and hidden information: An experiment

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  • Cabrales, Antonio
  • Charness, Gary

Abstract

We devise an experiment to explore optimal contracts in a hidden-information context. A principal offers one of three possible contract menus to a team of two agents of unknown skill levels, with both agents' participation needed for production. We observe numerous rejections of the more lopsided menus, and principals respond by offering more favorable menus. Apart from rejections, we see almost complete separation in agent choices according to the agent types. Behavior converges towards a consensus in which one of the more equitable menus is proposed and agents accept a contract. The consensus menu differs across two treatments in which we vary the payoffs resulting from a rejection. We find strong evidence of social learning by low-skill agents (but only for low-skilled agents), in that a low-skill agent is more likely to reject a contract menu if her teammate rejected a contract menu in the previous period. In addition, low-skilled agents have a particularly adverse reaction to reduced wage offers.

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  • Cabrales, Antonio & Charness, Gary, 2011. "Optimal contracts with team production and hidden information: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 77(2), pages 163-176, February.
    • Handle: RePEc:eee:jeborg:v:77:y:2011:i:2:p:163-176
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    2. Kocher, Martin G. & Luhan, Wolfgang J. & Sutter, Matthias, 2012. "Testing a forgotten aspect of Akerlof’s gift exchange hypothesis: Relational contracts with individual and uniform wages," Discussion Papers in Economics 12816, University of Munich, Department of Economics.
    3. Corgnet, Brice & Gómez-Miñambres, Joaquín & Hernán-González, Roberto, 2018. "Goal setting in the principal–agent model: Weak incentives for strong performance," Games and Economic Behavior, Elsevier, vol. 109(C), pages 311-326.
    4. Petra Nieken & Patrick W. Schmitz, 2023. "Contracting under asymmetric information and externalities: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 26(5), pages 989-1021, November.
    5. Marco Kleine & Sebastian Kube, 2015. "Communication and Trust in Principal-Team Relationships: Experimental Evidence," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2015_06, Max Planck Institute for Research on Collective Goods.
    6. Ernst Fehr & Michael Powell & Tom Wilkening, 2021. "Behavioral Constraints on the Design of Subgame-Perfect Implementation Mechanisms," American Economic Review, American Economic Association, vol. 111(4), pages 1055-1091, April.
    7. Schmitz, Patrick W. & Hoppe-Fischer, Eva, 2009. "Gathering Information before Signing a Contract: Experimental Evidence," CEPR Discussion Papers 7252, C.E.P.R. Discussion Papers.
    8. Priyodorshi Banerjee & P. Srikant & Sujoy Chakravarty, 2020. "Contracting Outcomes with Communication and Learning," Studies in Microeconomics, , vol. 8(1), pages 18-43, June.
    9. Jian Wang & Xintian Zhuang & Jun Yang & Jiliang Sheng, 2014. "The effects of optimism bias in teams," Applied Economics, Taylor & Francis Journals, vol. 46(32), pages 3980-3994, November.
    10. Antonio Cabrales & Gary Charness & Marie Villeval, 2011. "Hidden information, bargaining power, and efficiency: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 14(2), pages 133-159, May.
    11. Benndorf, Volker & Rau, Holger A., 2012. "Competition in the workplace: An experimental investigation," DICE Discussion Papers 53, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    12. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1516-1544.
    13. Neilson, William & Price, Michael & Wichmann, Bruno, 2018. "Added surplus and lost bargaining power in long-term contracting," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 76(C), pages 7-22.
    14. Arce, Daniel G., 2013. "Principals’ preferences for agents with social preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 154-163.
    15. Roberto Sarkisian, 2021. "Screening Teams of Moral and Altruistic Agents," Games, MDPI, vol. 12(4), pages 1-11, October.

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