Principal-Agent Settings with Random Shocks

Jared Rubin and Roman Sheremeta

Working Papers from Chapman University, Economic Science Institute

Abstract: Using a gift exchange experiment, we show that the ability of reciprocity to overcome incentive problems inherent in principal-agent settings is greatly reduced when the agent’s effort is distorted by random shocks and transmitted imperfectly to the principal. Specifically, we find that gift exchange contracts without shocks encourage effort and wages well above standard predictions. However, the introduction of random shocks reduces wages and effort, regardless of whether the shocks can be observed by the principal. Moreover, the introduction of shocks significantly reduces the probability of fulfilling the contract by the agent, the payoff of the principal, as well as total welfare.

Keywords: gift exchange; principal-agent model; contract theory; reciprocity; effort; shocks; laboratory experiment (search for similar items in EconPapers)
JEL-codes: C72 C91 D63 D81 H50 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2012
New Economics Papers: this item is included in nep-bec, nep-cta, nep-exp, nep-gth and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.chapman.edu/research-and-institutions/e ... th-random-shocks.pdf

Related works:
Journal Article: Principal–Agent Settings with Random Shocks (2016)
Working Paper: Principal-Agent Settings with Random Shocks (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:12-21

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