The Effects Of Social Preference Related Information On Contract Design

The classical contract theory assumes that people are self-interested and rational,but experimental evidence shows that the theory based on such assumption fails to explain and predict people's actual decisions in real economic activities.For example,Lim and Ho(2007) and Ho and Ho Zhang(2008) show that variety of contracts fail to coordinate predicted.Behavioral economics shows that people consider not only their own economic benefit but also the benefit of others.People's social preferences such as reciprocity,fairness,and altruism influence their behavior,which explains why they deviate from theoretical predictions.Intuitively,these factors will have an impact on the behaviors of the contracting parties,but only a few studies take these social preference factors into account when designing contracts and testing their impact on participant behavior.This dissertation incorporates social preference factors into contract design and investigates how social preference-related information influences contract design and contract participant behavior.This dissertation outlines three representative problems: hidden action,hidden information,and asset-specific investment in classic contract theory.We propose related hypotheses after conducting a theoretical analysis of the possible impact of these social preferences on the aforementioned contracts.Subsequently,this dissertation employs experimental economics methods to create a controllable microeconomic environment in the laboratory and collect experimental data.The corresponding hypotheses are tested in terms of statistical significance using statistics and econometrics methods based on the experimental data.Based on the experimental data,statistics and econometrics methods are used to test the corresponding hypotheses in the sense of statistical significance.This dissertation's main work and conclusions are as follows:Firstly,this dissertation investigates the impact of social preference information on contract design within the context of the hidden action problem.In the theoretical aspect,this dissertation establishes and solves a principal agent model,in which the principal motivates the agent to provide a higher effort level with a fixed salary and piece rate,and the principal can use a fixed salary higher than the agent's reference point to trigger the agent's positive reciprocity.According to the model equilibrium,when the agent's reciprocity level revealed by information disclosure is high,the principal will trigger the agent's reciprocal preference with a high fixed salary.In terms of experimental work,this dissertation employs a two-stage experiment to put theoretical predictions to the test.The experimental results show that when individual level reciprocal information is available,the principal will personalize the wage contract,and a significant portion of the principals provides a higher fixed wage.However,the experimental results did not support another prediction of the theoretical model,that the principal can benefit more from wage personalization.Furthermore,in order to comprehend the reasons for this,the parameters in the theoretical model are estimated in this dissertation.The estimation results show that the agents in the individual information treatment have a higher fixed salary expectation than the agents in the social information treatment,making it more difficult to trigger the agent's reciprocity.At the same time,the principal's individual level information is significantly negatively correlated with the agent's wage expectations,but not with the reciprocity level measure.Secondly,using the framework of hidden information,this dissertation investigates the impact of social preference information on contract design.In the theoretical aspect,this dissertation develops a screening model through which the principal can obtain information about the agent's fairness concern regarding another agent and the principal.According to the theoretical model,social preference reduces the principal's revenue to compensate for the loss of utility caused by the agent's concern about his relative revenue level.In the experimental aspect,this dissertation designs two experimental treatments that correspond to two situations in which the principal can observe the agent's social preference related information and the information cannot be observed by the principal.The experimental results show that the principal prefers to provide a menu contract rather than a single contract.When information on social preferences becomes available,such concerns will have an impact on the contract design of the principal.However,when the principal can design the contract based on social preference information,neither the principal nor the agent will benefit more from it.Finally,this dissertation examines the influence of social preference under the holdup problem.In the theoretical aspect,this dissertation analyzes a typical relation specific investment problem,and expounds the investment inefficiency under the equilibrium assumption of self-interested rationality.Based on the existing literature,we analyze the possible sources of investment incentives.In the experimental aspect,this dissertation uses experimental design to decompose a typical holdup game.We employ two information treatments and one no-information treatment.One information treatment is composed of an ultimatum game and a holdup game,while another information treatment is comprised of a trust game and a holdup game.In the information treatments,by providing investors with this distribution behavior information of the investee from the previous stage,the impact of the information on investor behavior are studied.The results of the experiment show that this information disclosure will have an impact on investors and that they will benefit from it.In the two information treatments,the reciprocity preference causes the investees raise the offer level,but the ex post veto power has limited effect on the investee's offer level.Moreover,even when investors have access to this infor-mation,they continue to make numerous investment mistakes.Based on the estimation of the investee's utility function,we propose the correct way of using the information.This dissertation has the following contributions:(1)Under the hidden action problem framework,the principal can trigger the agent's reciprocal preference in a way that is higher than the agent's expected wage,but in the case of wage personalization,the agent's expected wage becomes higher,so triggering the agent's positive reciprocity becomes harder.Subsequently,the principal cannot obtain a higher level of revenue under wage personalization.(2)According to the hidden information problem framework,this dissertation investigates the problem of how to screen agents' cost type when they have social preferences.The findings show that social preferences can be viewed as a cost to the principal,making it difficult to increase the prin-cipal's revenue level when compared to the no-social preference condition.(3)In terms of the holdup problem framework,the results show that the investor's expected reciprocity effectively promotes investors' investment incentives rather than the ex post veto power after the investment.This dissertation enriches the literature on contract design based on social preference,and also provides a theoretical foundation for incorporating the influence of social preference on contracts into decision-making considerations in practice.