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The use of non-monotonic contracts in a single period game: An experimental investigation

Timothy Flannery and Stephen Roberts

Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2018, vol. 77, issue C, 177-185

Abstract: This paper explores whether laboratory students design non-monotonic contracts when they are theoretically optimal in a simple principal-agent context. The principal constructs a contract for three possible outcomes, LOW, MEDIUM, and HIGH, and the agent observes the contract and responds with either an effort level of 0 or 12. Non-monotonic contracts that motivate high effort are optimal for principals because effort only affects the probability of LOW and MEDIUM outcomes. Our experiment has two treatments: one where principals interact with human agents and another with computer agents. Principals only select non-monotonic contracts with a frequency of 15% and 33% in each treatment, respectively. The results are consistent with concerns about equity and agent rationality.

Keywords: Non-monotonic contracts; Principal-agent problems; Non-monotonicity; Experimental economics; Contract theory; Moral hazard (search for similar items in EconPapers)
JEL-codes: C91 D86 J31 (search for similar items in EconPapers)
Date: 2018
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