Björn Bartling, Ernst Fehr, and Holger Herz, “The Intrinsic Value of Decision Rights.” University of Zurich, Department of Economics Working Paper No. 120, April 19, 2013 [updated version available].
• Consider a principal-agent situation, where the principal would like to have a task accomplished. The principal can control fully the choice of task and effort, or can delegate the choices to an agent with different preferences -- though the delegation, if it takes place, can specify a minimum effort level. The question that the authors explore is whether the principal is willing to sacrifice some expected return just to keep control.
• In their experiment, the answer is… “Yes”: principals give up more than 16% in certainty equivalent terms to control the choices. The higher the stakes, the greater the intrinsic value that principals place on control. Also, and oddly, the closer the alignment between principal and agent preferences, the greater the intrinsic value of control to the principal, even though the agent would make similar choices to what the principal makes, and the principal knows that.
• Note that the intrinsic value of control or ownership is non-transferable; it is subject to a sort of endowment effect. Sometimes proposed corporate mergers become undone because neither group of executives is willing to cede control.
• Entrepreneurs and scientists seem to sacrifice income for control.
Showing posts with label Fehr. Show all posts
Showing posts with label Fehr. Show all posts
Saturday, July 25, 2015
Monday, July 6, 2015
Fehr and Gächter (2000) on Reciprocity
Ernst Fehr and Simon Gächter, “Fairness and Retaliation: The Economics of Reciprocity.” Journal of Economic Perspectives 14(3): 159-181, Summer, 2000.
• Positive reciprocity is when a kind act is met with kindness in return; negative reciprocity is when an unkind or unfair act is met with retaliation.
• The existence of a subset of reciprocal actors can enforce cooperative norms, though details of the environment will matter as to whether cooperation will out.
• In the Ultimatum Game, offers of less than 30% of the stake often get rejected, indicating that some types of negative reciprocity are common. But some 20 or 30 percent of folks do not reciprocate. People might be a little more likely to be negative reciprocators (punishing unfair acts) than positive reciprocators (rewarding good behavior).
• In some settings, the behavior of reciprocal people and self-interested people eventually becomes indistinguishable, whether for cooperating or free riding; that is, their motives are different, but their actual behaviors can be identical. Opportunities to punish free riders are key to sustaining cooperation.
• Reciprocity can promote contract enforcement.
• The provision of explicit incentives in a contractual relationship can engender mistrust and lead to lessened effort. As a result, firms might prefer incomplete contracts that lead to a sort of “gift exchange” and high effort.
• Positive reciprocity is when a kind act is met with kindness in return; negative reciprocity is when an unkind or unfair act is met with retaliation.
• The existence of a subset of reciprocal actors can enforce cooperative norms, though details of the environment will matter as to whether cooperation will out.
• In the Ultimatum Game, offers of less than 30% of the stake often get rejected, indicating that some types of negative reciprocity are common. But some 20 or 30 percent of folks do not reciprocate. People might be a little more likely to be negative reciprocators (punishing unfair acts) than positive reciprocators (rewarding good behavior).
• In some settings, the behavior of reciprocal people and self-interested people eventually becomes indistinguishable, whether for cooperating or free riding; that is, their motives are different, but their actual behaviors can be identical. Opportunities to punish free riders are key to sustaining cooperation.
• Reciprocity can promote contract enforcement.
• The provision of explicit incentives in a contractual relationship can engender mistrust and lead to lessened effort. As a result, firms might prefer incomplete contracts that lead to a sort of “gift exchange” and high effort.
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