Contracting Under Incomplete Information and Social Preferences: An Experimental Study

68 Pages Posted: 1 Feb 2013

See all articles by Eva I. Hoppe

Eva I. Hoppe

University of Cologne - Department of Economics

Patrick W. Schmitz

University of Cologne; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2013

Abstract

Principal-agent models in which the agent has access to private information before a contract is signed are a cornerstone of contract theory. We have conducted an experiment with 720 participants to explore whether the theoretical insights are reflected by the behavior of subjects in the laboratory and to what extent deviations from standard theory can be explained by social preferences. Investigating settings with both exogenous and endogenous information structures, we find that agency theory is indeed useful to qualitatively predict how variations in the degree of uncertainty affect subjects' behavior. Regarding the quantitative deviations from standard predictions, our analysis based on several control treatments and quantal response estimations shows that agents' behavior can be explained by social preferences that are less pronounced than in conventional ultimatum games. Principals' own social preferences are not an important determinant of their behavior. However, when the principals make contract offers, they anticipate that social preferences affect agents' behavior.

Keywords: Adverse selection, Agency theory, Experiment, Information gathering, Social preferences, Ultimatum game

JEL Classification: C72, C91, D82, D86

Suggested Citation

Hoppe, Eva I. and Schmitz, Patrick W., Contracting Under Incomplete Information and Social Preferences: An Experimental Study (January 2013). CEPR Discussion Paper No. DP9287, Available at SSRN: https://ssrn.com/abstract=2210257

Eva I. Hoppe (Contact Author)

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

Patrick W. Schmitz

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

HOME PAGE: http://schmitz.uni-koeln.de/index.php?s=mitarbeiter&t=schmitz

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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