Document Type
Article
Publication Date
2012
Abstract
Using a gift exchange experiment, we show that the ability of reciprocity to overcome incentive problems inherent in principal-agent settings is greatly reduced when the agent’s effort is distorted by random shocks and transmitted imperfectly to the principal. Specifically, we find that gift exchange contracts without shocks encourage effort and wages well above standard predictions. However, the introduction of random shocks reduces wages and effort, regardless of whether the shocks can be observed by the principal. Moreover, the introduction of shocks significantly reduces the probability of fulfilling the contract by the agent, the payoff of the principal, as well as total welfare.
Recommended Citation
Rubin, J. and Sheremeta, R.M. (2012). Principal-agent settings with random shocks. ESI Working Paper 12-21. Retrieved from http://digitalcommons.chapman.edu/esi_working_papers/68
Comments
Working Paper 12-21