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The effect of random shocks on reciprocal behavior in dynamic principal-agent settings

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  • Rudolf Kerschbamer
  • Regine Oexl

Abstract

Previous work has shown that unobservable random shocks on output have a detrimental effect on effort provision in short-term ('static') employment relationships. Given the prevalence of long-term ('dynamic') relationships in firms, we investigate whether the impact of shocks is similarly pronounced in gift-exchange relationships where the same principal-agent pair interacts repeatedly. In dynamic relationships, shocks have a significantly less pronounced negative effect on the agent's effort provision than in static relationships. In an attempt to identify the drivers for our results we find that the combination of a repeated-game effect and a noise-canceling effect is required to avoid the detrimental effects of unobservable random shocks on effort provision.

Suggested Citation

  • Rudolf Kerschbamer & Regine Oexl, 2021. "The effect of random shocks on reciprocal behavior in dynamic principal-agent settings," Working Papers 2021-27, Faculty of Economics and Statistics, Universität Innsbruck.
    • Handle: RePEc:inn:wpaper:2021-27
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    References listed on IDEAS

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    More about this item

    Keywords

    Gift exchange; principal agent model; incomplete contracts; random shocks; reciprocity; laboratory experiments; long-term contracts;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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