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Theories of behavior in principal-agent relationships with hidden action
[Théories du comportement dans une relation principal-agent, avec action dissimulée]

Author

Listed:
  • Claudia Keser

    (CIRANO - Centre interuniversitaire de recherche en analyse des organisations)

  • Marc Willinger

    (LAMETA - Laboratoire Montpelliérain d'Économie Théorique et Appliquée - UM1 - Université Montpellier 1 - UPVM - Université Paul-Valéry - Montpellier 3 - INRA - Institut National de la Recherche Agronomique - Montpellier SupAgro - Centre international d'études supérieures en sciences agronomiques - UM - Université de Montpellier - CNRS - Centre National de la Recherche Scientifique - Montpellier SupAgro - Institut national d’études supérieures agronomiques de Montpellier, CNRS - Centre National de la Recherche Scientifique)

Abstract

In a laboratory experiment, we investigate behavior in a principal–agent situation with moral hazard. We evaluate the predictive success of two theories. One is the standard agency theory, which assumes that the agent will accept any contract offer that satisfies his participation constraint, typically requiring zero expected utility. The other is the "fair-offer" theory suggested by Keser and Willinger [2000. Principals' principles when agents' actions are hidden. International Journal of Industrial Organization 18 (1), 163–185], which requires that the principal provide full insurance against losses to the agent and leave him a share of at most 50% of the generated surplus. The treatment variable of our experiment is the cost of effort. As effort costs increase, expected net surplus of a contract decreases. We observe that fair-offer theory generally predicts observed contract offers better than standard agency theory. However, the predictive success of the fair-offer theory decreases, while the one of standard agency theory increases with decreasing expected net surplus.

Suggested Citation

  • Claudia Keser & Marc Willinger, 2007. "Theories of behavior in principal-agent relationships with hidden action [Théories du comportement dans une relation principal-agent, avec action dissimulée]," Post-Print hal-02662664, HAL.
    • Handle: RePEc:hal:journl:hal-02662664
    DOI: 10.1016/j.euroecorev.2006.10.007
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    References listed on IDEAS

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