It has long been standard in agency theory to search for
incentive-compatible mechanisms on the assumption that
people care only about their own material wealth. However,
this assumption is clearly refuted by numerous experiments,
and we feel that it may be useful to consider nonpecuniary
utility in mechanism design and contract theory. Accordingly,
we devise an experiment to explore optimal contracts in an
adverse-selection context. A principal proposes one of
three contract menus, each ...
It has long been standard in agency theory to search for
incentive-compatible mechanisms on the assumption that
people care only about their own material wealth. However,
this assumption is clearly refuted by numerous experiments,
and we feel that it may be useful to consider nonpecuniary
utility in mechanism design and contract theory. Accordingly,
we devise an experiment to explore optimal contracts in an
adverse-selection context. A principal proposes one of
three contract menus, each of which offers a choice of
two incentive-compatible contracts, to two agents whose
types are unknown to the principal. The agents know the
set of possible menus, and choose to either accept one of
the two contracts offered in the proposed menu or to reject
the menu altogether; a rejection by either agent leads to
lower (and equal) reservation payoffs for all parties. While
all three possible menus favor the principal, they do so to
varying degrees. We observe numerous rejections of the more
lopsided menus, and approach an equilibrium where one of the
more equitable contract menus (which one depends on the
reservation payoffs) is proposed and agents accept a contract,
selecting actions according to their types. Behavior is
largely consistent with all recent models of social preferences,
strongly suggesting there is value in considering nonpecuniary
utility in agency theory.
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