Working Paper: CEPR ID: DP11002
Authors: Eva I. Hoppe; Patrick W. Schmitz
Abstract: We present the first large-scale laboratory experiment designed to capture the canonical hidden action problem as studied in contract theory, comparing treatments with unobservable effort to benchmark treatments with verifiable effort. In line with contract theory, when effort is a hidden action, the chosen effort levels crucially depend on the contractibility of the outcome. In our one-shot experiment the players endogenously negotiate contracts. In the absence of communication, they typically avoid gift-exchange situations. Even when the outcome is contractible and the hidden action problem is typically overcome with incentive-compatible contracts, communication is helpful since it may reduce strategic uncertainty.
Keywords: contract theory; hidden action; incentive theory; laboratory experiments; moral hazard
JEL Codes: C72; C92; D82; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contract type (incentive-compatible) (D86) | high effort decisions (D91) |
| contract type (non-incentive-compatible) (D86) | low effort decisions (D91) |
| communication (with) (L96) | high effort outcomes (D29) |
| communication (without) (L96) | strategic uncertainty (D89) |
| strategic uncertainty (D89) | differences in effort outcomes (D29) |
| hidden action (effort) + contractibility (outcome) (D86) | incentive-compatible contracts (D86) |