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Optimal Contracts, Adverse Selection, and Social Preferences: An Experiment

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dc.affiliation.dptoUC3M. Departamento de Economíaes
dc.contributor.authorCabrales, Antonio
dc.contributor.authorCharness, Gary
dc.date.accessioned2009-01-23T10:23:24Z
dc.date.available2009-01-23T10:23:24Z
dc.date.issued2000
dc.description.abstractIt has long been standard in agency theory to search for incentivecompatible 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.mimetypeapplication/pdf
dc.identifier.urihttps://hdl.handle.net/10016/3487
dc.language.isoeng
dc.publisherUniversidad Pompeu Fabra. Departamento de Economia y Empresa
dc.relation.ispartofseriesWorking papers;
dc.relation.ispartofseries2000
dc.relation.publisherversionhttp://www.econ.upf. ... rs/downloads/478.pdf
dc.rights.accessRightsopen access
dc.subjectAdverse selection
dc.subjectcontract theory
dc.subjectexperiment
dc.subjectprincipal-agent problem
dc.subject.ecienciaEconomía
dc.subject.jelA13
dc.subject.jelB49
dc.subject.jelC91
dc.subject.jelC92
dc.subject.jelD21
dc.subject.jelJ41
dc.titleOptimal Contracts, Adverse Selection, and Social Preferences: An Experiment
dc.typeworking paper*
dspace.entity.typePublication
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