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Optimal Contracts With Team Production And Hidden Information: An Experiment

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  • Charness, Gary B
  • Cabrales, Antonio

Abstract

It is standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. Yet it may be useful to consider social forces in mechanism design and contract theory. 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 types. We observe numerous rejections of the more lopsided menus, and approach an equilibrium where one of the more equitable menus is proposed and agents accept a contract, selecting actions according to their types. The consensus menu differs across treatments that vary the payoffs resulting from a rejection. We find that an agent is more likely to reject a contract menu if her teammate rejected a contract menu in the previous period, suggesting that agents may be learning social norms; in addition, low-ability agents have a particularly adverse reaction to reduced wage offers.

Suggested Citation

  • Charness, Gary B & Cabrales, Antonio, 2008. "Optimal Contracts With Team Production And Hidden Information: An Experiment," University of California at Santa Barbara, Economics Working Paper Series qt3bb3p3t3, Department of Economics, UC Santa Barbara.
  • Handle: RePEc:cdl:ucsbec:qt3bb3p3t3
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    3. 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.
    4. Cabrales, Antonio & Villeval, Marie Claire & Charness, Gary, 2006. "Competition, hidden information, and efficiency : an experiment," UC3M Working papers. Economics we071909, Universidad Carlos III de Madrid. Departamento de Economía.
    5. Benndorf, Volker & Rau, Holger A., 2012. "Competition in the workplace: An experimental investigation," DICE Discussion Papers 53, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. repec:eee:gamebe:v:109:y:2018:i:c:p:311-326 is not listed on IDEAS
    7. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," Review of Economic Studies, Oxford University Press, vol. 80(4), pages 1516-1544.
    8. 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.
    9. Arce, Daniel G., 2013. "Principals’ preferences for agents with social preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 90(C), pages 154-163.
    10. Hoppe, Eva I & Schmitz, Patrick W, 2009. "Gathering Information before Signing a Contract: Experimental Evidence," CEPR Discussion Papers 7252, C.E.P.R. Discussion Papers.
    11. 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.
    12. Martin G. Kocher & Wolfgang J. Luhan & Matthias Sutter, 2012. "Testing a forgotten aspect of Akerlof�s gift exchange hypothesis: Relational contracts with individual and uniform wages," Working Papers 2012-02, Faculty of Economics and Statistics, University of Innsbruck.

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