Skip to main content
SpringerLink
Log in

Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment

  • Published:
Experimental Economics Aims and scope Submit manuscript

Abstract

We study behavior within a simple principal-agent experiment. Our design allows for a large class of linear contracts. Principals can offer any feasible combination of (negative) fixed wages and incentives in the form of return sharing. This great contractual flexibility allows us to study incentive compatibility simultaneously with issues of 'fair sharing' and reciprocity, which were previously found to be important. We find a high degree of incentive-compatible behavior, but also 'fair sharing' and reciprocity. In contrast to other incentive devices studied in the literature, the incentives are 'reciprocity-compatible'. Principals recognize the agency problem and react accordingly.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Alston, L. and Higgs, R. (1982). “Contractual Mix in Southern Agriculture Since the CivilWar: Facis, Hypotheses, and Tests.” Journal of Economic History XLII. 2, 327–352.

    Google Scholar 

  • Berg, J., Daley, L., Dickhaut, J., and O'Brien, J. (1986). “Controlling Preferences for Lotteries on Units of Experimental Exchange.” Quarterly Journal of Economics. 101, 281–306.

    Google Scholar 

  • Berg, J., Daley, L., Dickhaut, J., and O'Brien, J. (1992). “Moral Hazard and Risk Sharing: Experimental Evidence.” In Mark Isaac (ed.), Research in Experimental Economics. Vol. 5, Greenwich: JAI Press Inc., pp. 1–34.

    Google Scholar 

  • Berg, J., Dickhaut, J., and Rietz, T. (1999). “On the Performance of the Lottery Procedure for Controlling Risk Preferences.” Mimeo.

  • Bewley, T. (1999). Why Wages Don't Fall During a Recession. Cambridge: Harvard University Press.

    Google Scholar 

  • Bhattacharyya, S. and Lafontaine, F. (1995). “Double-Sided Moral Hazard and the Nature of Share Contracts.” RAND Journal of Economics. 26, 761–781.

    Google Scholar 

  • Bull, C., Schotter, A., and Weigelt, K. (1987). “Tournaments and Piece Rates: An Experimental Study.” Journal of Political Economy. 95, 1–33.

    Google Scholar 

  • Camerer, C. (1995). “Individual Decision Making.” In J. Kagel and A. Roth (eds.), The Handbook of Experimental Economics. Princeton: Princeton University Press.

    Google Scholar 

  • Camerer, C., Babcock, L., Loewenstein, G., and Thaler, R. (1997). “Labor Supply of New York City Cab Drivers: One Day at a Time.” Quarterly Journal of Economics. CXII, 407–441.

    Google Scholar 

  • Chaudhuri, A. (1998). “The Ratchet Principle in a Principal Agent Game with Unknown Costs: An Experimental Analysis.” Journal of Economic Behavior and Organization. 37, 291–304.

    Google Scholar 

  • Chisholm, D. (1997). “Profit-Sharing Versus Fixed-Payment Contracts: Evidence From the Motion Pictures Industry.” Journal of Law, Economics, and Organization. 13, 169–201.

    Google Scholar 

  • Davis, D. and Holt, C. (1993). Experimental Economics. Princeton, NJ: Princeton University Press.

    Google Scholar 

  • DeJong, D., Forsythe, R., and Lundholm, R. (1985). “Ripoffs, Lemons, and Reputation Formation in Agency Relationships: A Laboratory Market Study.” Journal of Finance. 40, 809–823.

    Google Scholar 

  • DeJong, D., Forsythe, R. Lundholm, R., and Uecker,W. (1985). “A Laboratory Investigation of the Moral Hazard Problem in an Agency Relationship.” Journal of Accounting Research. 23(Suppl.), 81–120.

    Google Scholar 

  • Epstein, S. (1992). “Testing Principal-Agent Theory.” In Mark Isaac (ed.), Research in Experimental Economics. Vol. 5, Greenwich: JAI Press Inc., pp 35–60.

    Google Scholar 

  • Fehr, E. and Gächter, S. (1998). “Reciprocity and Economics: The Economic Implications of Homo Reciprocans.” European Economic Review. 42, 845–859.

    Google Scholar 

  • Fehr, E. and Gächter, S. (2002). “Do Incentive Contracts Undermine Voluntary Cooperation?” Working Paper No. 34, Institute for Empirical Research in Economics, University of Zurich.

  • Fehr, E., Gächter, S., and Kirchsteiger, G. (1997). “Reciprocity as a Contract Enforcement Device—Experimental Evidence.” Econometrica. 65, 833–860.

    Google Scholar 

  • Fischbacher, U. (1999). “z-Tree: Zurich Toolbox for Readymade Economic Experiments.” Working Paper No. 21, Institute for Empirical Research in Economics, University of Zurich.

  • Grossman, S. and Hart, O. (1983). “An Analysis of the Principal-Agent Problem.” Econometrica. 51, 7–45.

    Google Scholar 

  • Güth, W., Klose, W., Königstein, M., and Schwalbach, J. (1998). “An Experimental Study of a Dynamic Principal-Agent Relationship.” Managerial and Decision Economics. 19, 327–341.

    Google Scholar 

  • Güth, W., Königstein, M., Kovács, J., and Zala-Mezõ, E. (2001). “FairnessWithin Firms: The Case of one Principal and Multiple Agents.” Schmalenbach Business Review (Zeitschrift f¨ur betriebswirtschaftliche Forschung). 53, 82–101.

    Google Scholar 

  • Hackett, S. (1993). “Incomplete Contracting: A Laboratory Experimental Analysis.” Economic Inquiry. XXI, 274–297.

    Google Scholar 

  • Hart, O. and Holmström, B. (1987). “The Theory of Contracts.” In T. Bewley (ed.), Advances in Economic Theory. Fifth World Congress. Cambridge: Cambridge University Press.

    Google Scholar 

  • Holmström, B. (1979). “Moral Hazard and Observability.” Bell Journal of Economics. 10, 74–1.

    Google Scholar 

  • Holmström, B. and Milgrom, P. (1987). “Aggregation and Linearity in the Provision of Intertemporal Incentives.” Econometrica. 55, 231–259.

    Google Scholar 

  • Keser, C. and Willinger, M. (2000). “Principal-Agent Relations with Hidden Actions: An Experimental Investigation.” International Journal of Industrial Organization. 18, 163–185.

    Google Scholar 

  • Loomes, G. (1998). “Probabilities vs Money: A Test of Some Fundamental Assumptions about Rational Decision Making.” Economic Journal. 108, 477–489.

    Google Scholar 

  • Mathewson, G.F. and Winter, R. (1985). “The Economics of Franchise Contracts.” Journal of Law & Economics. XXVIII, 503–526.

    Google Scholar 

  • Nalbantian, H. and Schotter, A. (1997). “Productivity Under Group Incentives: An Experimental Study.” American Economic Review. 87, 314–341.

    Google Scholar 

  • Plott, C. and Wilde, L. (1982). “Professional Diagnosis vs. Self-Diagnosis: An Experimental Examination of Some Special Features of Markets with Uncertainty.” In V. Smith (ed.), Research in Experimental Economics. Vol. 2, Greenwich: JAI Press Inc., pp. 63–111.

    Google Scholar 

  • Prendergast, C. (1999). “The Provision of Incentives in Firms.” Journal of Economic Literature. XXXVII, 7–63.

    Google Scholar 

  • Roth, A. (1995). “Bargaining Experiments.” In J. Kagel and A. Roth (eds.), Handbook of Experimental Economics. Princeton: Princeton University Press.

    Google Scholar 

  • Salanié, B. (1997). The Economics of Contracts. A Primer. The MIT Press.

  • Selten, R. (1975). “Reexamination of the Perfectness Concept for Equilibrium Points in Extensive Games.” International Journal of Game Theory. 4, 25–55.

    Google Scholar 

  • Selten, R., Sadrieh, A., and Abbink, K. (1999). “Money Does Not Induce Risk Neutral Behavior, but Binary Lotteries Do even Worse.” Theory and Decision. 46, 211–249.

    Google Scholar 

  • Shavell, S. (1979). “Risk Sharing and Incentives in the Principal and Agent Relationship.” Bell Journal of Economics. 10, 55–73.

    Google Scholar 

  • Slonim, R. and Roth, A. (1998). “Learning in High Stakes Ultimatum Games: An Experiment in the Slovak Republic.” Econometrica. 66, 569–596.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Humboldt-University at Berlin, Spandauer Strasse 1, D-10178, Berlin, Germany

    Vital Anderhub & Manfred Königstein

  2. FEW-HSG, University of St. Gallen, Varnbüelstrasse 14, CH-9000, St. Gallen, Switzerland

    Simon Gächter

Authors
  1. Vital Anderhub
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Simon Gächter
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Manfred Königstein
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Anderhub, V., Gächter, S. & Königstein, M. Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment. Experimental Economics 5, 5–27 (2002). https://doi.org/10.1023/A:1016380207200

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1023/A:1016380207200

Search

Navigation