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Principal’s distributive preferences and the incentivization of agents

Author

Listed:
  • Sophie Cêtre

    (Institut de Radioprotection et de Sûreté Nucléaire)

  • Max Lobeck

    (University of Konstanz)

Abstract

Do principals' distributive preferences affect the allocation of incentives within firms? We run a Principal-Agent lab experiment, framed as a firm setting. In the experiment, subjects are randomized in the principal or worker position. Principals must choose piece rate wage contracts for two workers that differ in terms of ability. Workers have to choose an effort level that is non-contractible. Principals are either paid in proportion to the output produced (Stakeholder treatment) or paid a fixed wage (Spectator treatment). We study how principals make trade-offs between incentive concerns (motivating workers to maximize output) and their own normative distributive preferences. We find that, despite the firm-frame and the moral hazard situation, principals do hold egalitarian concerns, as principals are on average willing to trade off their firm's performance (and so their own income) for more wage equality among their workers. The willingness to reduce inequality among workers is sensitive to both extensive and intensive margin incentives, which shows that principals' choices are shaped by incentives that they face themselves.

Suggested Citation

  • Sophie Cêtre & Max Lobeck, 2023. "Principal’s distributive preferences and the incentivization of agents," Experimental Economics, Springer;Economic Science Association, vol. 26(3), pages 646-672, July.
  • Handle: RePEc:kap:expeco:v:26:y:2023:i:3:d:10.1007_s10683-023-09791-0
    DOI: 10.1007/s10683-023-09791-0
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    More about this item

    Keywords

    Fairness; Distributive preferences; Principal-agent; Social preferences;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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