An Experimental Study of Tournaments and Contracts: A Principal's Perspective
Asechemie, Daniel Pele Samuel
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https://hdl.handle.net/2142/71404
Description
Title
An Experimental Study of Tournaments and Contracts: A Principal's Perspective
Author(s)
Asechemie, Daniel Pele Samuel
Issue Date
1987
Doctoral Committee Chair(s)
Beck, Paul J.
Department of Study
Accountancy
Discipline
Accountancy
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Accounting
Abstract
Three types of incentive systems that have been modeled in the literature are the tournament, the Holmstrom team contract, and the dichotomous contract. The objective of the present study is to determine experimentally which of these contracts principals perceive to be superior to the others under different conditions of principals' risk aversion, common uncertainty and number of agents (complexity).
Specific theoretical expectations were generated by means of a numerical example that admitted ex post observability of common uncertainty and gains to ex ante randomization of reward systems. The numerical analysis implied that (a) the team contract would be chosen by most subjects in every condition, followed closely by the dichotomous contract; (b) as risk aversion and complexity increased, the perceived differences among the reward systems would narrow, but that common uncertainty would have a mixed effect; (c) the independent variables would have significant main and interaction effects on reward systems choice.
Two laboratory experiments were performed to test the theoretical expectations. Experiment I was the main one in which learning and feedback were not allowed. A 2 x 2 x 2 factorial design, where reward system choice was the dependent variable and risk aversion, common uncertainty and complexity were the independent variables, was employed. In experiment II, there was learning, and positive feedback was provided for the team contract and negative feedback for the others. For its design, the two cells of the experiment I design matrix in which the team contract was expected to dominate the other systems most were selected, allowing learning and feedback the greatest chance to overcome the team contract's complexity.
The experimental results confirmed prediction (b). As for (a), the tournament and the dichotomous contract did better than expected because of fairness and simplicity--two factors ignored in the economic theory. Regarding (c), risk aversion and common uncertainty showed significant interaction (but no main) effect. Contrariwise, complexity showed significant main effect only.
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