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

Rudolf Kerschbamer () and Regine Oexl ()

Working Papers from Faculty of Economics and Statistics, University of Innsbruck

Abstract: Previous work has shown that unobservable random shocks on output have a detrimental effect on effort provision 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 the agent's effort provision than in static relationships. In an attempt to identify the drivers for our results we find that the combination of a repeated-game effect and a noise-canceling effect is required to avoid the detrimental effects of unobservable random shocks on effort provision.

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)
Pages: 56
Date: 2021
New Economics Papers: this item is included in nep-cta, nep-cwa, nep-exp and nep-hrm
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