Self Selection and market power in risk sharing contracts (original) (raw)
2013, Journal of Economic Behavior & Organization
Although the theory of optimal contracts and the principal agent model are now well established in the literature, empirical support for this theory has been mixed at best. We use economic experiments to test contract theory and assess the empirical relevance of two possible confounding factors that may explain why the theory has not received stronger empirical support. First, parameters of interest may be biased if agents self-select into projects with di¤ering risk pro…les based on risk preferences. Second, di¤ering levels of market power on either side of the market could play a confounding role. In general, we …nd support for classical contract theory augmented to accommodate market power and self-selection based on risk preferences. We also …nd evidence for a third confound in the form of the characteristics of agents not party to the transaction a¤ecting the terms of the contract.
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