Contracting under Incomplete Information and Social Preferences: An Experimental Study

Patrick Schmitz and Eva Hoppe

No 9287, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Principal-agent models in which the agent has access to private information before a contract is signed are a cornerstone of contract theory. We have conducted an experiment with 720 participants to explore whether the theoretical insights are reflected by the behavior of subjects in the laboratory and to what extent deviations from standard theory can be explained by social preferences. Investigating settings with both exogenous and endogenous information structures, we find that agency theory is indeed useful to qualitatively predict how variations in the degree of uncertainty affect subjects' behavior. Regarding the quantitative deviations from standard predictions, our analysis based on several control treatments and quantal response estimations shows that agents' behavior can be explained by social preferences that are less pronounced than in conventional ultimatum games. Principals' own social preferences are not an important determinant of their behavior. However, when the principals make contract offers, they anticipate that social preferences affect agents' behavior.

Keywords: Adverse selection; Agency theory; Experiment; Information gathering; Social preferences; Ultimatum game (search for similar items in EconPapers)
JEL-codes: C72 C91 D82 D86 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-cta and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Related works:
Journal Article: Contracting under Incomplete Information and Social Preferences: An Experimental Study (2013)
Working Paper: Contracting under Incomplete Information and Social Preferences: An Experimental Study (2013)
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