Bounded Rationality in Principal‐Agent Relationships

Mathias Erlei and Heike Schenk-Mathes
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Heike Schenk-Mathes: Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal), https://www.wiwi.tu-clausthal.de/abteilungen/volkswirtschaftslehre/

TUC Working Papers in Economics from Abteilung für Volkswirtschaftslehre, Technische Universität Clausthal (Department of Economics, Technical University Clausthal)

Abstract: We conducted six treatments of a standard moral hazard experiment with hidden action. All treatments had identical Nash equilibria. However, the behavior in all treatments and periods was inconsistent with established agency theory (Nash equilibrium). In the early periods of the experiment, behavior differed significantly between treatments. This difference largely vanished in the final periods. We used logit equilibrium (LE) as a device to grasp boundedly rational behavior and found the following: (1) LE predictions are much closer to subjects’ behavior in the laboratory; (2) LE probabilities of choosing between strategies and experimental behavior show remarkably similar patterns; and (3) profit‐maximizing contract offers according to the LE are close to those derived from regressions.

Keywords: experiment; logit equilibrium; moral hazard; hidden action (search for similar items in EconPapers)
JEL-codes: C72 C92 J31 L14 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2012
New Economics Papers: this item is included in nep-cbe, nep-cta, nep-evo, nep-exp, nep-gth, nep-hpe and nep-upt
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http://ftp.tu-clausthal.de/pub/institute/wiwi/RePE ... PA_Relationships.pdf (application/pdf)

Related works:
Journal Article: Bounded Rationality in Principal-Agent Relationships (2017)
Journal Article: Bounded Rationality in Principal-Agent Relationships (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:tuc:tucewp:0006

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