The effect of random shocks on reciprocal behavior in dynamic principal-agent settings

Rudolf Kerschbamer and Regine Oexl ()
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Regine Oexl: University of Innsbruck

Experimental Economics, 2023, vol. 26, issue 2, No 10, 468-488

Abstract: Abstract Previous work has shown that unobservable random shocks on output have a detrimental effect on efficiency in short-term (‘static’) employment relationships. Given the prevalence of long-term (‘dynamic’) relationships in firms, we investigate whether the impact of shocks is similarly pronounced in gift-exchange relationships where the same principal-agent pair interacts repeatedly. In dynamic relationships, shocks have a significantly less pronounced negative effect on efficiency than in static relationships. In an attempt to identify the drivers for our results we find that the combination of a repeated-game effect (current misbehavior can be punished in future periods) and a noise-canceling effect (part of the noise cancels out in the long run) is required to avoid the detrimental effects of unobservable random shocks on efficiency.

Keywords: Gift exchange; Principal agent model; Incomplete contracts; Random shocks; Reciprocity; Laboratory experiments; Long-term contracts (search for similar items in EconPapers)
JEL-codes: C72 C91 D81 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s10683-022-09771-w

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