A Behavioral Economic Study Of Incentive And Trust

In neoclassical economics, the main objective of the economic man was to maximize the revenue as well as to minimize the cost.While the prospect theory of Kahneman and Tversky(1979) came with four innovations. 1) reference dependent, 2) loss aversion, 3) sensitivity diminishing, and 4) probability weighting. Its main idea was the asymmetry of the utility gains and losses. In addition, in economic interaction, more and more eoncomic behavior deviating from neoclassical assumptions were observed, which means that the individual cared about others’ utility, as well as the gap between himself and others or the expection and the real utility. Behavioural economists included such behavior and preferences into the modification and restruction of the utility function.In the principal-agent analysis framework, the principal-agent theory followed the hypothesis of "economic man" assumption, which was the basic neoclassical economic research paradigm, and the main to premise of which were the assumptions of the relationship between principal and agent and the asymmetric information. Principal faced two constraints from the agent while maximizing his expect unitilty function: the participation constraint and the incentive compatibility constraint. After Koszegi and Rabin(2006, 2007, 2009) took reference dependence and loss aversion into discussion, they expanded the definition of the incentive compatibility constraint, as they thought that the refence point would be affected by the behavior after the decision. As the reference point of the dicisioner would adjust according to his later behavior, as well as he knew that personal belief would adjust according to the later behavior, he would have taken this into thought before the decision was made, which is the choice-acclimation personal equilibrium. The behavioral change of both the principal and the agent under the constraint of the choice-acclimation personal equilibrium was more in line with the real situation in behavioral economics.The content of this paper are as follows: 1, in the framework of principal-agent, I design an incentive contract of loss aversion agent. if there are random results, the agent will suffer from the loss of utility which is under his own reference point. When the loss is bigger than the income of his wage, it will cause him loss of the whole utility. The principal should compensate for this bad situation at some level of probability, which makes the agent’s income no less than when he gets the good result. 2, I put a trust index into the principal-agent model, which shows that the more the employer trust the employee, the higher effort will be observed from the employees, as well as the higher percent of the surplus the employee would receive. 3, I use the trust game and centipede game to reveal trust discrimination and in-group favorism. Due to the regional differences andstatistical result of the trust discrimimation, the investment decision was made according to his own correct expectation of his partner’s trustworthiness.Main contributions of this article are as follows: 1, the innovation design of incentive contract: I add multipal randomness into the contract, to see wheather the principal would compensate for the agent during the low performance to minimize the utility loss of refence dependence and loss aversion overruling his own income. 2 the qualitative and quantitative research of trust: The social and psychological research of trust uasually use survey methods. I follow the definition of trust in Fehr(2009) to give quantitative result of trust. 3 Expansion of subject pool: The local reseach usually use college students as subject pool. I invite immigrant workers into the lab to take part in the game interaction with college stuedents. They show slightly difference in group trust differences and discriminations, and their cooperative resutls are lower than the students. As we are entering the new era of field experiments, the expansion of subject pool is the preliminary attempt.