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Design a Contract: A Simple Principal-Agent Problem as a Classroom Experiment

Author

Listed:
  • Simon Gächter
  • Manfred Königstein

Abstract

The authors present a simple classroom experiment that can be used as a teaching device to introduce important concepts of organizational economics and incentive contracting. First, students take the role of a principal and design a contract that consists of a fixed payment and an incentive component. Second, students take the role of agents and decide on an effort level. The experiment illustrates shirking opportunities of the agent and the importance of work incentives. Furthermore, it can be used to introduce students to the concepts of contractual incompleteness, efficiency, incentive compatibility, outside options and participation constraints, the Coase theorem, and the potential roles of fairness and reciprocity in contracting.

Suggested Citation

  • Simon Gächter & Manfred Königstein, 2009. "Design a Contract: A Simple Principal-Agent Problem as a Classroom Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 40(2), pages 173-187, April.
    • Handle: RePEc:taf:jeduce:v:40:y:2009:i:2:p:173-187
    DOI: 10.3200/JECE.40.2.173-187
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    Cited by:

    1. Gerald Eisenkopf & Pascal A. Sulser, 2016. "Randomized controlled trial of teaching methods: Do classroom experiments improve economic education in high schools?," The Journal of Economic Education, Taylor & Francis Journals, vol. 47(3), pages 211-225, July.
    2. Sascha Füllbrunn & Tibor Neugebauer, 2013. "Limited Liability, Moral Hazard, And Risk Taking: A Safety Net Game Experiment," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1389-1403, April.

    More about this item

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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