Design a Contract! A Simple Principal-Agent Problem as a Classroom Experiment

Simon Gaechter () and Manfred Koenigstein ()
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Simon Gaechter: University of Nottingham
Manfred Koenigstein: University of Erfurt
Authors registered in the RePEc Author Service: Simon Gächter

No 2006-04, Discussion Papers from The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham

Abstract: We present a simple classroom principal-agent experiment that can effectively be used as a teaching device to introduce important concepts of organizational economics and contracting. In a first part, students take the role of a principal and design a contract that consists of a fixed payment and an incentive component. In the second part, students take the role of agents and decide on an effort level. The experiment can be used to introduce students to the concepts of efficiency, incentive compatibility, outside options and participation constraints, the Coase theorem, and fairness and reciprocity in contracting.

Keywords: Classroom experiments; post-contractual opportunism; incentive contracts; efficiency; reciprocity; Coase theorem (search for similar items in EconPapers)
JEL-codes: A22 C92 (search for similar items in EconPapers)
Date: 2006-04
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