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The use of non-monotonic contracts in a single period game: An experimental investigation

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  • Flannery, Timothy
  • Roberts, Stephen

Abstract

This paper explores whether laboratory students design non-monotonic contracts when they are theoretically optimal in a simple principal-agent context. The principal constructs a contract for three possible outcomes, LOW, MEDIUM, and HIGH, and the agent observes the contract and responds with either an effort level of 0 or 12. Non-monotonic contracts that motivate high effort are optimal for principals because effort only affects the probability of LOW and MEDIUM outcomes. Our experiment has two treatments: one where principals interact with human agents and another with computer agents. Principals only select non-monotonic contracts with a frequency of 15% and 33% in each treatment, respectively. The results are consistent with concerns about equity and agent rationality.

Suggested Citation

  • Flannery, Timothy & Roberts, Stephen, 2018. "The use of non-monotonic contracts in a single period game: An experimental investigation," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 77(C), pages 177-185.
    • Handle: RePEc:eee:soceco:v:77:y:2018:i:c:p:177-185
    DOI: 10.1016/j.socec.2018.10.002
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    Cited by:

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    3. Flannery, Timothy & Sibert, Cara Elisabeth, 2019. "Learning from Forced Completion vs the Option to Opt Out: An Experiment on a Hybrid of the Game of 21 and the Centipede Game," OSF Preprints vfuqw, Center for Open Science.

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    More about this item

    Keywords

    Non-monotonic contracts; Principal-agent problems; Non-monotonicity; Experimental economics; Contract theory; Moral hazard;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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