IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/95618.html
   My bibliography  Save this paper

Hidden Action and Outcome Contractibility: An Experimental Test of Moral Hazard Theory

Author

Listed:
  • Hoppe, Eva I.
  • Schmitz, Patrick W.

Abstract

In a laboratory experiment with 754 participants, we study the canonical one-shot moral hazard problem, comparing treatments with unobservable effort to benchmark treatments with verifiable effort. In our experiment, the players endogenously negotiate contracts. In line with contract theory, the contractibility of the outcome plays a crucial role when effort is a hidden action. If the outcome is contractible, most players overcome the hidden action problem by agreeing on incentive-compatible contracts. Communication is helpful, since it may reduce strategic uncertainty. If the outcome is non-contractible, in most cases low effort is chosen whenever effort is a hidden action. However, communication leads the players to agree on larger wages and substantially mitigates the underprovision of effort.

Suggested Citation

  • Hoppe, Eva I. & Schmitz, Patrick W., 2018. "Hidden Action and Outcome Contractibility: An Experimental Test of Moral Hazard Theory," MPRA Paper 95618, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:95618
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/95618/1/MPRA_paper_95618.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, December.
    3. Paarsch, Harry J & Shearer, Bruce, 2000. "Piece Rates, Fixed Wages, and Incentive Effects: Statistical Evidence from Payroll Records," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 59-92, February.
    4. Ernst Fehr & Lorenz Goette & Christian Zehnder, 2009. "A Behavioral Account of the Labor Market: The Role of Fairness Concerns," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 355-384, May.
    5. Tore Ellingsen & Magnus Johannesson, 2004. "Promises, Threats and Fairness," Economic Journal, Royal Economic Society, vol. 114(495), pages 397-420, April.
    6. Martin Brown & Armin Falk & Ernst Fehr, 2004. "Relational Contracts and the Nature of Market Interactions," Econometrica, Econometric Society, vol. 72(3), pages 747-780, May.
    7. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    8. Ernst Fehr & Georg Kirchsteiger & Arno Riedl, 1993. "Does Fairness Prevent Market Clearing? An Experimental Investigation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 437-459.
    9. Claudia M. Landeo & Kathryn E. Spier, 2009. "Naked Exclusion: An Experimental Study of Contracts with Externalities," American Economic Review, American Economic Association, vol. 99(5), pages 1850-1877, December.
    10. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
    11. Cason, Timothy N. & Sheremeta, Roman M. & Zhang, Jingjing, 2012. "Communication and efficiency in competitive coordination games," Games and Economic Behavior, Elsevier, vol. 76(1), pages 26-43.
    12. Cason, Timothy N. & Mui, Vai-Lam, 2015. "Rich communication, social motivations, and coordinated resistance against divide-and-conquer: A laboratory investigation," European Journal of Political Economy, Elsevier, vol. 37(C), pages 146-159.
    13. Jordi Brandts & Matthew Ellman & Gary Charness, 2016. "Let'S Talk: How Communication Affects Contract Design," Journal of the European Economic Association, European Economic Association, vol. 14(4), pages 943-974, August.
    14. Hoppe, Eva I. & Schmitz, Patrick W., 2015. "Do sellers offer menus of contracts to separate buyer types? An experimental test of adverse selection theory," Games and Economic Behavior, Elsevier, vol. 89(C), pages 17-33.
    15. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
    16. Keser, Claudia & Willinger, Marc, 2007. "Theories of behavior in principal-agent relationships with hidden action," European Economic Review, Elsevier, vol. 51(6), pages 1514-1533, August.
    17. Schmitz, Patrick W., 2002. "On the Interplay of Hidden Action and Hidden Information in Simple Bilateral Trading Problems," Journal of Economic Theory, Elsevier, vol. 103(2), pages 444-460, April.
    18. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 1-48.
    19. Philippe Aghion & Drew Fudenberg & Richard Holden & Takashi Kunimoto & Olivier Tercieux, 2012. "Subgame-Perfect Implementation Under Information Perturbations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(4), pages 1843-1881.
    20. Tore Ellingsen & Magnus Johannesson, 2004. "Is There a Hold‐up Problem?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 475-494, October.
    21. Antonio Cabrales & Gary Charness & Marie Villeval, 2011. "Hidden information, bargaining power, and efficiency: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 14(2), pages 133-159, May.
    22. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
    23. Bruce Shearer, 2004. "Piece Rates, Fixed Wages and Incentives: Evidence from a Field Experiment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 513-534.
    24. Gary Charness & Martin Dufwenberg, 2011. "Participation," American Economic Review, American Economic Association, vol. 101(4), pages 1211-1237, June.
    25. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1516-1544.
    26. Charness, Gary & Dufwenberg, Martin, 2003. "Promises & Partnership," Research Papers in Economics 2003:3, Stockholm University, Department of Economics.
    27. Keser, Claudia & Willinger, Marc, 2000. "Principals' principles when agents' actions are hidden," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 163-185, January.
    28. Gary Charness & Martin Dufwenberg, 2006. "Promises and Partnership," Econometrica, Econometric Society, vol. 74(6), pages 1579-1601, November.
    29. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
    30. Claudia M. Landeo & Kathryn E. Spier, 2012. "Exclusive Dealing and Market Foreclosure: Further Experimental Results," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 168(1), pages 150-170, March.
    31. Elena Asparouhova, 2006. "Competition in Lending: Theory and Experiments," Review of Finance, European Finance Association, vol. 10(2), pages 189-219.
    32. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
    33. Ernst Fehr & Oliver Hart & Christian Zehnder, 2008. "Contracts as reference points � experimental evidence," IEW - Working Papers 393, Institute for Empirical Research in Economics - University of Zurich.
    34. Charness, Gary & Dufwenberg, Martin, 2010. "Bare promises: An experiment," Economics Letters, Elsevier, vol. 107(2), pages 281-283, May.
    35. Steffen Huck & Andrew J. Seltzer & Brian Wallace, 2011. "Deferred Compensation in Multiperiod Labor Contracts: An Experimental Test of Lazear's Model," American Economic Review, American Economic Association, vol. 101(2), pages 819-843, April.
    36. repec:hal:pseose:hal-00812781 is not listed on IDEAS
    37. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brown, Martin & Schmitz, Jan & Zehnder, Christian, 2024. "Communication and hidden action: A credit market experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 218(C), pages 423-455.
    2. Kandul, Serhiy & Lanz, Bruno & Reins, Evert, 2023. "Reciprocity and gift exchange in markets for credence goods," Games and Economic Behavior, Elsevier, vol. 141(C), pages 52-69.
    3. Casoria, Fortuna & Riedl, Arno & Werner, Peter, 2020. "Behavioral Aspects of Communication in Organizations," IZA Discussion Papers 13005, Institute of Labor Economics (IZA).
    4. Fabio Römeis & Fabian Herweg & Daniel Müller, 2022. "Salience Bias and Overwork," Games, MDPI, vol. 13(1), pages 1-22, January.
    5. Leitner, Stephan & Wall, Friederike, 2022. "Micro-level dynamics in hidden action situations with limited information," Journal of Economic Behavior & Organization, Elsevier, vol. 204(C), pages 372-393.
    6. Nuño Ledesma José G. & Wu Steven Y. & Balagtas Joseph V., 2022. "Nonlinear Pricing Under Regulation: Comparing Cap Rules and Taxes in the Laboratory," Working Papers 2022-10, Banco de México.
    7. Ngang, Andre Nso & Kamdem, Cyrille Bergaly & Mbeh, Christian Bernard Kaldjob & Pedelahore, Philippe & Onana, Dieudonne & Etoa, Joephine Mireille Akoa, 2020. "Labour contracts and performance of cocoa farms in Mbam and Kim in Cameroon," African Journal of Agricultural and Resource Economics, African Association of Agricultural Economists, vol. 15(2), June.
    8. KATO, Hiroki & KIM, Youngrok, 2024. "Charity Fraud : An Experimental Study of the Moral Hazard Problem in the Charity Market," Discussion paper series HIAS-E-139, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    9. Xia, Dan & Wang, Xiang-Qian, 2021. "The synergetic impact of environmental and innovation information disclosure on corporate financial performance: An empirical study based on China coal listed companies," Technovation, Elsevier, vol. 100(C).
    10. Xianyi Wang & Xiaofang Wang & Hui He, 2021. "Contracts to Coordinate Healthcare Providers in the Telemedicine Referral System," Sustainability, MDPI, vol. 13(18), pages 1-25, September.
    11. Veronika Grimm & Holger A Rau & Simeon Schächtele, 2020. "Gender differences in multi-employee gift exchange with self-reported contributions," PLOS ONE, Public Library of Science, vol. 15(9), pages 1-19, September.
    12. Mol, Jantsje M. & Botzen, W. J. Wouter & Blasch, Julia E., 2020. "Risk reduction in compulsory disaster insurance: Experimental evidence on moral hazard and financial incentives," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 84(C).
    13. Liu, Chao & Lv, Jingyu & Hou, Ping & Lu, Danrong, 2023. "Disclosing products’ freshness level as a non-contractible quality: Optimal logistics service contracts in the fresh products supply chain," European Journal of Operational Research, Elsevier, vol. 307(3), pages 1085-1102.
    14. Zhang, Zhikun & Zhang, Chuang & Shen, Lu, 2020. "Deterring dealer slackness: The role of supplier incentives and monitoring and the market environment," Journal of Business Research, Elsevier, vol. 121(C), pages 353-363.
    15. Du, Ninghua & Shahriar, Quazi, 2024. "Information disclosure in mitigating moral hazard: An experimental investigation," Games and Economic Behavior, Elsevier, vol. 144(C), pages 284-299.
    16. Andre, Nso Ngang & Bergaly, Kamdem Cyrille & Philippe, Pedelahore & Bernard, Kaldjob Mbeh Christian & Mireille, Akoa Etoa, 2016. "Contrats de travail et performance des systèmes agroforestiers à base de cacao dans la zone du Mbam et Kim (Centre-Cameroun)," 2016 Fifth International Conference, September 23-26, 2016, Addis Ababa, Ethiopia 249296, African Association of Agricultural Economists (AAAE).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schmitz, Patrick W. & Hoppe-Fischer, Eva, 2015. "Hidden Action and Outcome Contractibility: An Experimental Test of Contract Theory," CEPR Discussion Papers 11002, C.E.P.R. Discussion Papers.
    2. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
    3. Schmitz, Patrick W. & Kusterer, David J., 2018. "Government versus Private Ownership of Public Goods: Experimental Evidence," CEPR Discussion Papers 13204, C.E.P.R. Discussion Papers.
    4. Kusterer, David J. & Schmitz, Patrick W., 2017. "The management of innovation: Experimental evidence," Games and Economic Behavior, Elsevier, vol. 104(C), pages 706-725.
    5. Sebastian Kunte & Meike Wollni & Claudia Keser, 2017. "Making it personal: breach and private ordering in a contract farming experiment," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 44(1), pages 121-148.
    6. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 3, pages 229-330, Elsevier.
    7. Morita, Hodaka & Servátka, Maroš, 2013. "Group identity and relation-specific investment: An experimental investigation," European Economic Review, Elsevier, vol. 58(C), pages 95-109.
    8. Hoppe, Eva I. & Schmitz, Patrick W., 2015. "Do sellers offer menus of contracts to separate buyer types? An experimental test of adverse selection theory," Games and Economic Behavior, Elsevier, vol. 89(C), pages 17-33.
    9. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1516-1544.
    10. Dufwenberg, Martin & Servátka, Maroš & Vadovič, Radovan, 2017. "Honesty and informal agreements," Games and Economic Behavior, Elsevier, vol. 102(C), pages 269-285.
    11. Petra Nieken & Patrick W. Schmitz, 2023. "Contracting under asymmetric information and externalities: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 26(5), pages 989-1021, November.
    12. Claudia M. Landeo & Kathryn E. Spier, 2016. "Stipulated Damages as a Rent-Extraction Mechanism: Experimental Evidence," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 172(2), pages 235-273, June.
    13. Simon Gaechter & Esther Kessler & Manfred Koenigstein, 2011. "The roles of incentives and voluntary cooperation for contractual compliance," Discussion Papers 2011-06, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    14. Committee, Nobel Prize, 2016. "Oliver Hart and Bengt Holmström: Contract Theory," Nobel Prize in Economics documents 2016-1, Nobel Prize Committee.
    15. Eduard Marinov, 2016. "The 2016 Nobel Prize in Economics," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 97-149.
    16. Faralla, Valeria & Borà, Guido & Innocenti, Alessandro & Novarese, Marco, 2020. "Promises in group decision making," Research in Economics, Elsevier, vol. 74(1), pages 1-11.
    17. Jordi Brandts & Matthew Ellman & Gary Charness, 2016. "Let’s Talk: How Communication Affects Contract Design," Journal of the European Economic Association, European Economic Association, vol. 14(4), pages 943-974.
    18. Schmitz, Patrick W., 2010. "Contractual solutions to hold-up problems with quality uncertainty and unobservable investments," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 807-816, September.
    19. Yadi Yang, 2021. "A Survey Of The Hold‐Up Problem In The Experimental Economics Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 35(1), pages 227-249, February.
    20. Kaiming Zheng & Xiaoyuan Wang & Debing Ni & Yang Yang, 2020. "Reciprocity and Veto Power in Relation-Specific Investments: An Experimental Study," Sustainability, MDPI, vol. 12(10), pages 1-19, May.

    More about this item

    Keywords

    Moral hazard; Hidden action; Contract theory; Incentive theory; Laboratory experiments;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:95618. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.