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Contracting under Incomplete Information and Social Preferences: An Experimental Study

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  • Hoppe, Eva I
  • Schmitz, Patrick W

Abstract

Principal-agent models in which the agent has access to private information before a contract is signed are a cornerstone of contract theory. We have conducted an experiment with 720 participants to explore whether the theoretical insights are reflected by the behavior of subjects in the laboratory and to what extent deviations from standard theory can be explained by social preferences. Investigating settings with both exogenous and endogenous information structures, we find that agency theory is indeed useful to qualitatively predict how variations in the degree of uncertainty affect subjects' behavior. Regarding the quantitative deviations from standard predictions, our analysis based on several control treatments and quantal response estimations shows that agents' behavior can be explained by social preferences that are less pronounced than in conventional ultimatum games. Principals' own social preferences are not an important determinant of their behavior. However, when the principals make contract offers, they anticipate that social preferences affect agents' behavior.

Suggested Citation

  • Hoppe, Eva I & Schmitz, Patrick W, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," CEPR Discussion Papers 9287, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9287
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    Cited by:

    1. Claudia M. Landeo & Kathryn E. Spier, 2016. "Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(2), pages 235-273, June.
    2. repec:bla:jemstr:v:26:y:2017:i:1:p:231-256 is not listed on IDEAS
    3. Bierbrauer, Felix & Netzer, Nick, 2016. "Mechanism design and intentions," Journal of Economic Theory, Elsevier, vol. 163(C), pages 557-603.
    4. Hoppe, Eva I & Schmitz, Patrick W, 2015. "Hidden Action and Outcome Contractibility: An Experimental Test of Contract Theory," CEPR Discussion Papers 11002, C.E.P.R. Discussion Papers.
    5. repec:bla:germec:v:18:y:2017:i:4:p:411-443 is not listed on IDEAS
    6. Güth, Werner & Kocher, Martin G., 2014. "More than thirty years of ultimatum bargaining experiments: Motives, variations, and a survey of the recent literature," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 396-409.
    7. Hoppe, Eva I. & Schmitz, Patrick W., 2015. "Do sellers offer menus of contracts to separate buyer types? An experimental test of adverse selection theory," Games and Economic Behavior, Elsevier, vol. 89(C), pages 17-33.
    8. Mathias Erlei & Heike Schenk-Mathes, 2017. "Bounded Rationality in Principal-Agent Relationships," German Economic Review, Verein für Socialpolitik, vol. 18(4), pages 411-443, November.
    9. Ola Andersson & Håkan J. Holm & Jean-Robert Tyran & Erik Wengström, 2016. "Deciding for Others Reduces Loss Aversion," Management Science, INFORMS, vol. 62(1), pages 29-36, January.
    10. Daniel L. Chen, 2015. "Can markets stimulate rights? On the alienability of legal claims," RAND Journal of Economics, RAND Corporation, vol. 46(1), pages 23-65, March.
    11. Werner Güth & M. Vittoria Levati & Chiara Nardi & Ivan Soraperra, 2014. "An ultimatum game with multidimensional response strategies," Jena Economic Research Papers 2014-018, Friedrich-Schiller-University Jena.

    More about this item

    Keywords

    Adverse selection; Agency theory; Experiment; Information gathering; Social preferences; Ultimatum game;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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