Hidden Action and Outcome Contractibility: An Experimental Test of Contract Theory

Patrick Schmitz and Eva Hoppe

No 11002, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We present the first large-scale laboratory experiment designed to capture the canonical hidden action problem as studied in contract theory, comparing treatments with unobservable effort to benchmark treatments with verifiable effort. In line with contract theory, when effort is a hidden action, the chosen effort levels crucially depend on the contractibility of the outcome. In our one-shot experiment the players endogenously negotiate contracts. In the absence of communication, they typically avoid gift-exchange situations. Even when the outcome is contractible and the hidden action problem is typically overcome with incentive-compatible contracts, communication is helpful since it may reduce strategic uncertainty.

Keywords: Contract theory; Hidden action; Incentive theory; Laboratory experiments; Moral hazard (search for similar items in EconPapers)
JEL-codes: C72 C92 D82 D86 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-cta, nep-exp, nep-gth, nep-hrm and nep-mic
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