Optimal contracts, adverse selection and social preferences: An experiment

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• dc.contributor.author Cabrales, Antonioca
• dc.contributor.author Charness, Garyca
• dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
• dc.date.accessioned 2017-07-26T12:07:50Z
• dc.date.available 2017-07-26T12:07:50Z
• dc.date.issued 2000-06-01
• dc.date.modified 2017-07-23T02:05:24Z
• dc.description.abstract 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.
• dc.format.mimetype application/pdfca
• dc.identifier https://econ-papers.upf.edu/ca/paper.php?id=478
• dc.identifier.uri http://hdl.handle.net/10230/756
• dc.language.iso eng
• dc.relation.ispartofseries Economics and Business Working Papers Series; 478
• dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
• dc.subject.keyword adverse selection
• dc.subject.keyword contract theory
• dc.subject.keyword experiment
• dc.subject.keyword principal-agent problem
• dc.subject.keyword leex
• dc.subject.keyword Microeconomics
• dc.title Optimal contracts, adverse selection and social preferences: An experimentca
• dc.type info:eu-repo/semantics/workingPaper