Contract design in dynamic agency: An experimental analysis | Zendy

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Contract design in dynamic agency: An experimental analysis

Author(s) -

Lukas Christian

Publication year - 2017

Publication title -

managerial and decision economics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.288

H-Index - 51

eISSN - 1099-1468

pISSN - 0143-6570

DOI - 10.1002/mde.2859

Subject(s) - unobservable , incentive , agency (philosophy) , outcome (game theory) , principal–agent problem , principal (computer security) , microeconomics , compensation (psychology) , contract management , moral hazard , economics , contract theory , preference , duration (music) , actuarial science , business , econometrics , finance , marketing , computer science , psychology , corporate governance , social psychology , philosophy , art , literature , epistemology , operating system

This paper reports results from an experiment studying contract design in a dynamic 2‐period agency relationship with unobservable effort. A deferred compensation contract is theoretically optimal—it places all incentives on the outcomes in the second period. Observed contract choices offer a substantial part of the incentives for the high outcome in the first period suggesting a strong preference for timely rewards. Information about theoretically optimal bonuses and effort decisions shifts contract choices towards a deferred compensation contract. This contract structure is more profitable for principal participants.

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