Self Selection and market power in risk sharing contracts

Kislaya Prasad and Tim Salmon

Journal of Economic Behavior & Organization, 2013, vol. 90, issue C, 71-86

Abstract: Although the theory of optimal contracts and the principal agent model are now well established in the literature, empirical support for this theory has been mixed at best. We use economic experiments to test contract theory and assess the empirical relevance of two possible confounding factors that may explain why the theory has not received stronger empirical support. First, parameters of interest may be biased if agents self-select into projects with differing risk profiles based on risk preferences. Second, differing levels of market power on either side of the market could shift contract terms in ways contrary to theoretical predictions. In general, we find support for classical contract theory augmented to accommodate market power and self-selection based on risk preferences. We also find evidence for a third confound in the form of the characteristics of agents not party to the transaction affecting the terms of the contract.

Keywords: Incentive contracts; Principal–agent model; Self-selection; Market power; Experiments (search for similar items in EconPapers)
JEL-codes: C90 D86 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:90:y:2013:i:c:p:71-86

DOI: 10.1016/j.jebo.2013.03.007

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