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Inter-firm Social Dilemmas with Agency Risk

Author

Listed:
  • Timothy N. Cason
  • Lana Friesenand
  • Lata Gangadharan
Abstract
Many social dilemmas involve decisions made by firms. We design a laboratory experiment that represents firms’ principal-agent problem and includes an inter-firm social dilemma and stochastic agent performance. Agents’ unobservable effort affects the likelihood of a bad outcome occurring, such as a regulatory violation. This harms the agent's principal but can also damage others, thus creating an inter-firm social dilemma. In our baseline treatment, we omit the agency problem, and principals make their “firm's” effort decision directly. In the second treatment, principals can only offer an unconditional wage contract to their agent, although a non-contractual (ex-post) bonus can be paid. In a third treatment, principals can condition wages on the stochastic outcome, and a fourth treatment combines the conditional wage with a non-contractual bonus. We find that principals use a combination of a conditional wage and the non-contractual (ex-post) bonus to help overcome the agency problem and incentivize agents to choose higher effort. Fixed wage, unconditional contracts lead to significantly lower effort levels, even when augmented with bonuses. Similarly, conditional contracts on their own also perform poorly. Only the combination of conditional wage contracts and discretionary bonuses is effective in limiting agency risk to address the inter-firm social dilemma problem.
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Suggested Citation

  • Timothy N. Cason & Lana Friesenand & Lata Gangadharan, 2020. "Inter-firm Social Dilemmas with Agency Risk," Purdue University Economics Working Papers 1325, Purdue University, Department of Economics.
    • Handle: RePEc:pur:prukra:1325
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    Cited by:

    1. Timothy N. Cason & Lana Friesen & Lata Gangadharan, 2021. "Complying with environmental regulations: experimental evidence," Chapters, in: Ananish Chaudhuri (ed.), A Research Agenda for Experimental Economics, chapter 4, pages 69-92, Edward Elgar Publishing.

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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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