Design a Contract: A Simple Principal-Agent Problem as a Classroom Experiment
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.
Volume (Year): 40 (2009)
Issue (Month): 2 (April)
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References listed on IDEAS
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- Ernst Fehr & Simon Gächter, 2000.
"Fairness and Retaliation: The Economics of Reciprocity,"
Journal of Economic Perspectives,
American Economic Association, vol. 14(3), pages 159-181, Summer.
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- Colin F. Camerer & Richard H. Thaler, 1995. "Anomalies: Ultimatums, Dictators and Manners," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 209-219, Spring.
- Vital Anderhub & Simon Gächter & Manfred Königstein, 2002. "Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment," Experimental Economics, Springer;Economic Science Association, vol. 5(1), pages 5-27, June.
- Manfred K÷nigstein, 2001. "Optimal Contracting With Boundedly Rational Agents," Homo Oeconomicus, Institute of SocioEconomics, vol. 18, pages 211-228.
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