Repeated moral hazard and contracts with memory: A laboratory experiment

Abstract

Abstract. This paper reports data from a laboratory experiment on twoperiod moral hazard problems. The findings corroborate the contract-theoretic insight that even though the periods are technologically unrelated, due to incentive considerations principals can benefit from offering long-term contracts that exhibit memory.

Job Design with Conflicting Tasks Reconsidered

“…Nieken and Schmitz (2012) provide experimental evidence. Yet, these contributions do not consider conflicting tasks in the sense of Bolton and Dewatripont (2005) which are the focus of the present paper.…”

Contract design in dynamic agency: An experimental analysis

“…Experimental evidence supporting SPE behavior in experimental agency is rare (Lukas, 2007a;Nieken & Schmitz, 2012), but it could suggest conditions under which SPE contract choice is more likely. This may be the case if the choice set from which principals can choose is small (Lukas, 2007a), or if the optimal contract exhibits a special (easier-to-identify) type, for example, a forcing contract (Nieken & Schmitz, 2012). There is more experimental evidence that optimal contract design or contract choice (even) in single-period settings is difficult for participants (e.g., Cochard & Willinger, 2005;Fehr et al, 2007;Keser & Willinger, 2000).…”

“…Finally, it may be difficult for participants to actually determine the theoretically optimal contract. Although this may be easier with exogenously given (fixed) contracts (e.g., Berg et al, 1992;Brosig, Lukas, & Riechmann, 2010;Lukas, 2007a;Nieken & Schmitz, 2012), the task becomes challenging if participants can freely determine contract parameters (e.g., Fehr et al, 2007;Keser & Willinger, 2000, 2007.…”

“…For example, Chaudhuri (1998) and Charness, Kuhn, and Villeval (2010) investigate the ratchet effect in a dynamic agency model with hidden characteristics. Because I study a model with hidden action, my paper is related to Lukas (2007a), Brosig et al (2010), Cochard and Willinger (2005), Nieken andSchmitz (2012), andLukas (2016). Lukas (2007a), Brosig et al (2010), and Lukas (2016) study a setup similar to mine, but in their experiments, principals choose between two exogenously given contracts.…”

“…Lukas (2007a), Brosig et al (2010), and Lukas (2016) study a setup similar to mine, but in their experiments, principals choose between two exogenously given contracts. In contrast to these studies, Cochard and Willinger (2005), Huck, Seltzer, andWallace (2011), andNieken andSchmitz (2012) analyze settings in which the principal has substantial leeway in determining contract parameters. Cochard and Willinger (2005) investigate contract design in a repeated singleperiod setting with fixed matching of principals and agents.…”