Contract Choice: Efficiency and Fairness in Revenue‐Sharing Contracts

Karakostas, Alexandros; Sonntag, Axel; Zizzo, Daniel John

doi:10.1111/sjoe.12200

Cited by 13 publications

(8 citation statements)

References 40 publications

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“…Supporting the model's prediction, we find no relationship between the variance in the performance and the effort choice of the agent. Furthermore, we find a positive relationship between effort and the size of the piece rate offered (ceteris paribus), which is in line with the predictions of the model, and more generally with the assumption of payoff maximizing behavior found in the literature on incentive contracts (Anderhub et al 2002;Corgnet and Hernán-González 2018;Karakostas et al 2017;Sloof and van Praag 2010).…”

Section: Discussionsupporting

confidence: 89%

“…A positive frame of employer/employee was adopted instead of an abstract frame, as context can be useful to enhance understanding Kagel 2003, 2009) in an organizational setting. In addition, both the employer/employee frame (e.g., Fehr et al 1998;Karakostas et al 2017) and the buyer/seller frame (e.g., Fehr and Gächter 2002; have been previously used in the context of the gift exchange finding no qualitative differences between the frames.…”

Section: Experimental Designmentioning

confidence: 99%

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An experimental investigation of the ‘tenuous trade-off’ between risk and incentives in organizations

Chowdhury

Karakostas

2019

Theory Decis

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We investigate experimentally the relationship between risk and incentives in a principal-agent setting. In contrast to the existing empirical literature that describes such relationship as 'tenuous' or inconclusive, we find a clear negative relationship-supporting the prediction of the standard theoretical model. Specifically, we find that principals reduce the size of the offered piece rates with an increase in risk and instead provide positive fixed wages. Furthermore, we find no relationship between the variance in the performance and the effort choice of the agent, and a strong positive relationship between the effort choice of the agents and the offered piece rates as well as fixed wage, suggesting positive reciprocity. Finally, we find evidence of social projection by the principals regarding the agents' degree of risk aversion.

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Section: Discussionsupporting

confidence: 89%

Section: Experimental Designmentioning

confidence: 99%

An experimental investigation of the ‘tenuous trade-off’ between risk and incentives in organizations

Chowdhury

Karakostas

2019

Theory Decis

Self Cite

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“…The literature on contract design in labor markets can inform on possible candidates' choices. The closest papers to these two treatments are Fehr et al (2007), Fehr and Schmidt (2000), and Karakostas et al (2017), although these papers used one-worker-one-firm environments unlike the two-candidates-fivevoters environments employed here. For example, Fehr et al (2007) and Fehr and Schmidt (2000) showed principals' overwhelming support for a bonus contract (where a principal offers base wage in advance and a non-binding promise of bonus payment after effort provision), relative to a trust contract (where a principal offers only unconditional payment to the agent in advance), when each principal randomly interacts with an agent under a perfect stranger matching protocol.…”

Section: Discussion On Political Actor's Behaviorsmentioning

confidence: 99%

Incomplete Political Contracts with Secret Ballots: Reciprocity as a Force to Enforce Sustainable Clientelistic Relationships

Kamei

2020

The Journal of Law, Economics, and Organization

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Clientelism is frequently observed in our societies. Various mechanisms that help sustain incomplete political contracts (e.g., monitoring and punishment) have been studied in the literature to date. However, do such contracts emerge in elections with secret ballots when the interactions are one-shot? How does repetition affect the evolution of incomplete political contracts? Using an incentivized experiment, this paper finds that even during one-shot interactions where monitoring is not possible, candidates form incomplete contracts through vote buying and promise-making. The candidates' clientelistic behaviors are heterogeneous: some target swing voters, whereas others offer the most to loyal voters, or even opposition voters. These tactics distort voting behaviors as well as election outcomes. Repeated interactions significantly magnify candidates' offers and deepen clientelistic relationships. These results underscore the possibility that clientelism evolves due to people's strategic behaviors and interdependent preferences, without relying on alternative mechanisms.

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“…At the same time, many scholars proved that the decision maker is more caring about the envy than the compassion [27][28][29]; in other words, a preference for advantageous inequality is much less prominent. Moreover, as pointed by Scheer et al [30], people in some culture do not care about advantageous inequality.…”

Section: The Modelmentioning

confidence: 99%

“…We will also assume that the cost of the EN's effort is given by ( ) = 2 /2, while the cost of the VC's effort is ( ) = V 2 /2, where > 0 and V > 0 are efficiency parameters of the EN and VC, respectively. The quadratic cost function is widely used in the venture capital and contract theory literatures (e.g., [3][4][5][6][7][8][23][24][25][26][27]).…”

Section: Model Analysismentioning

confidence: 99%

Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

Chang

2018

Mathematical Problems in Engineering

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The development of new venture enterprise is the result of joint efforts of entrepreneurs and venture capitalists who collaborate based on complementary resources. In this paper, we analyze a venture capital incentive contracting model in which a venture capitalist interacts with an entrepreneur who is risk neutral and fairness concerned, offering him an equity contract. We solve the venture capitalist’s maximization problem in the presence of double-sided moral hazard. Our results show that fairness concerns change the structure of the optimal contract. More importantly, we show that the solution to the contract regarding the optimal share given to the entrepreneur is nonlinear and is a fixed point between 0 and 1. Further, we simulate the model under the assumption that venture project’s revenue is a Constant Elasticity of Substitution (CES) function and obtain the following results. (1) When the two efforts are complementary, the venture capitalist’s effort does not monotonically decrease in the share allocated to the entrepreneur, while the entrepreneur’s effort does not monotonically increase in his share. (2) Relative to the benchmark case where the entrepreneur is fairness neutral, the optimal equity share allocated to the fair-minded entrepreneur is larger than 1/2, and as the degree of efforts complementarity increases, the optimal equity share tends to 60%. In this scenario, for a given efforts substitution parameter, the fair-minded entrepreneur provides a higher effort level than the venture capitalist.

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Contract Choice: Efficiency and Fairness in Revenue‐Sharing Contracts

Cited by 13 publications

References 40 publications

An experimental investigation of the ‘tenuous trade-off’ between risk and incentives in organizations

An experimental investigation of the ‘tenuous trade-off’ between risk and incentives in organizations

Incomplete Political Contracts with Secret Ballots: Reciprocity as a Force to Enforce Sustainable Clientelistic Relationships

Venture Capital Contracting with Double-Sided Moral Hazard and Fairness Concerns

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