Premium
Fair Offers in a Repeated Principal–Agent Relationship with Hidden Actions
Author(s) -
Cochard François,
Willinger Marc
Publication year - 2005
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.0013-0427.2005.00412.x
Subject(s) - payment , principal (computer security) , subgame perfect equilibrium , order (exchange) , principal–agent problem , economics , microeconomics , test (biology) , business , computer science , mathematical economics , computer security , nash equilibrium , finance , corporate governance , paleontology , biology
We test a repeated principal–agent relationship with hidden actions in the laboratory. At each period, the principal offers payments to the agent in order to induce him to provide the high effort level. The agent can accept or reject the offer; if he accepts it, he can choose the high or the low effort level. We observe that offered payments are higher than predicted by the subgame‐perfect equilibrium, and higher in the partners' than in the strangers' design. Furthermore, agents strategically reject inequitable offers in early rounds in order to induce principals to increase payments in the subsequent rounds.