PRINCIPAL-AGENT NEGOTIATIONS IN CONTEXT: EXPERIMENTAL EVIDENCE ON AGENT EFFICACY AND EFFORT COST

PRINCIPAL-AGENT NEGOTIATIONS IN CONTEXT: EXPERIMENTAL EVIDENCE ON AGENT EFFICACY AND EFFORT COST

Abstract
Principal-agency theory has typically analyzed “the principal’s problem” – how to write a
contract with incentives that will induce an agent to work in the principal’s interest despite an
information asymmetry cloaking the agent’s efforts. Theoretically, the solution to the principal’s
problem uses an outcome-contingent bonus, the size of which is dependent on the agent’s
efficacy and marginal effort cost. In experiments, we find that principals do not typically rely on
bonuses, and that bonuses do not vary as predicted. We show that principals do not account for
key issues that determine the agent’s type, including the agent’s marginal effort cost and efficacy
of effor.

PRINCIPAL-AGENT NEGOTIATIONS IN CONTEXT EXPERIMENTAL EVIDENCE ON AGENT EFFICACY AND EFFORT COST

PRINCIPAL-AGENT NEGOTIATIONS IN CONTEXT: EXPERIMENTAL EVIDENCE ON AGENT EFFICACY AND EFFORT COST

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