Vecon Lab Principal/Agent Game: Introduction

This program runs a set of "Principal/Agent" games. The first mover (employer) makes a contract offer, and the second mover (worker) chooses whether to accept the contract. A worker who accepts a contract then chooses an effort level, which is costly to the worker but which benefits the employer. The possible contracts include fixed wage payments, along with possible ex post bonuses, monitoring, penalties, and/or profit sharing. If the contract only specifies a required fixed wage and an optional bonus, then the Nash equilibrium for selfish preferences in a one-shot game is to offer the minimum possible effort, since the wage is paid irrespective of effort. Efforts may be higher with fixed matchings or if participants are concerned with fairness and reciprocity. A number of contract options (based on penalties and rewards) are also available.

The game highlights issues of contract incentives, reciprocity, and strategy. Contracts involving trust or ex post unspecified bounuses may in some cases do as well or better than those with incentive provisions. This program was written in consultation with Rip Verkerke for use in his Contract Law Class at the University of Virginia.

Vecon Lab - December 4, 2023