Principals

Claudia Keser () and Marc Willinger
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Claudia Keser: Institut für Statistik und Mathematische Wirtschaftstheorie, Postal: Universität Karlsruhe, Rechenzentrum, Zirkel 2, 76128 Karlsruhe

No 97-30, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: We examine the behavior of subjects in a simple principal-agent game with hidden action. While subjects in the role of agents tend to choose the actions which maximize their expected profits, subjects in the role of principals offer contracts which differ from the theoretical predictions. We identify three principles of contract design. (1) The agents' remuneration for the better outcome is at least as high as the remuneration for the worse outcome. (2) The agent must not risk to make a loss. (3) The net profit of the agent should not be higher than the net profit of the principal.

Pages: 28 pages
Date: 1997-09-16
Note: We want to thank Karl-Martin Ehrhart, Martha Saboya, Simon Gächter, Reinhard Selten, Hubert Stahn, Bodo Vogt, and Anthony Ziegelmeyer for their valuable comments. Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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