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Optimal Contracts with Team Production and Hidden Information: An Experiment

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Author Info
Antonio Cabrales (Universitat Pompeu Fabra)
Gary Charness (University of California, Santa Barbara)

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Abstract

It is standard in agency theory to search for incentive-compatible mechanisms on the assumption that people care only about their own material wealth. Yet it may be useful to consider social preferences in mechanism design and contract theory. We devise an experiment to explore optimal contracts in an adverse-selection context. A principal offers one of three possible contract menus to a team of two agents of unknown types. We observe numerous rejections of the more lopsided menus, and approach an equilibrium where one of the more equitable menus (which one depends on the reservation payoffs) is proposed and agents accept a contract, selecting actions according to their types. We estimate the Fehr and Schmidt (1999) and Charness and Rabin (2002) models of social preferences with our data, and calculate ex post optimal social-preference contracts. In both cases, the principal could substantially enhance his profitability if he could offer the derived optimal contract menu. We also find evidence that an agent is substantially more likely to reject a contract menu if her teammate rejected a contract menu in the previous period, suggesting that agents may be learning social norms.

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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number 11-03.

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Date of creation: 01 Mar 2008
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Handle: RePEc:cdl:ucsbec:11-03

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Keywords: Adverse selection; Experiment; Optimal contract; Social preference;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Antonio Cabrales & Gary Charness & Marie-Claire Villeval, 2006. "Competition, Hidden Information, and Efficiency: an Experiment," Working Papers 0605, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure. [Downloadable!]
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  2. Sandra Maximiano & Randolph Sloof & Joep Sonnemans, 2004. "Gift Exchange in a Multi-worker Firm," Tinbergen Institute Discussion Papers 04-100/1, Tinbergen Institute. [Downloadable!]
    Other versions:
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