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Design a contract! : A simple principal-agent problem as a classroom experiment

Author

Listed:
  • Gächter, Simon
  • Königstein, Manfred

Abstract

We present a simple classroom principal-agent experiment that can effectively be used as a teaching device to introduce important concepts of organizational economics and contracting. In a first part, students take the role of a principal and design a contract that consists of a fixed payment and an incentive component. In the second part, students take the role of agents and decide on an effort level. The experiment can be used to introduce students to the concepts of efficiency, incentive compatibility, outside options and participation constraints, the Coase theorem, and fairness and reciprocity in contracting.

Suggested Citation

  • Gächter, Simon & Königstein, Manfred, 2006. "Design a contract! : A simple principal-agent problem as a classroom experiment," Discussion Papers 2006,001E, University of Erfurt, Faculty of Economics, Law and Social Sciences.
    • Handle: RePEc:zbw:erfdps:2006001e
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    2. 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.
    3. 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.

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    Keywords

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    JEL classification:

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

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