Using the concept of Inequity Aversion we derive in a Moral Hazard setting several results which differ from conventional contract theory. Our three key insights are: First, inequity aversion plays a crucial role in the design of optimal contracts. Second, there is a strong tendency towards...

During the recent sales of UMTS licenses in Europe some countries used auctions while others resorted to so-called Beauty Contests. There seems to be a wide consensus among economists that in these and other contexts like privatisation an auction is the better selling mechanism. However, why...

Empirically, compensation systems generate substantial effort despite weak monetary incentives. We consider reciprocal motivations as a source of incentives. We solve for the optimal contract in the basic principal-agent problem and show that reciprocal motivations and explicit performance-based...

An important aspect in determining the effectiveness of gift exchange relations in labor markets is the ability of the worker to "repay the gift" to the employer. To test this hypothesis, we conduct a real effort laboratory experiment where we vary the wage and the effect of the worker's effort...

We analyze a contest between two groups where group members have differing valuations for the contested rent. Generically the pivotal group member with the median valuation of the rent will not act himself but will want to send a group member that has preferences different to her own into the...

The industrialization process of a country is often plagued by a failure to coordinate investment decisions. Using the Global Games approach we can solve this coordination problem and eliminate the problem of multiple equilibria. We show how appropriate information provision enhances efficiency....

We address the question how much authority a principal should delegate to a manager with conflicting interests and uncertain ability in a context in which the manager has both compensation-based and reputational incentives. The optimal level of authority balances the value of the manager's...

There is ample empirical evidence indicating that a substantial fraction of the population exhibits social preferences. Recent work also shows that social preferences influence the effectiveness of incentives in labor relations. Hence when making contracting decisions, employers should take into...

To investigate the external validity of laboratory results, we combine a public good experiment with three treatments in a field experiment. One treatment offers the opportunity to free-ride, the other two are placebo treatments. We compare results within subjects. In the free-riding treatment,...

We conduct a field experiment where we vary both the presence of a gift exchange wage and the effect of the worker's effort on the manager's payoff. The results indicate a strong complementarity between the initial wage gift and the agent's ability to "repay the gift". We collect information on...