Robbing Peter to pay Paul? Delegation contracts and third-party spillovers
This study proposes an experimental design to analyze the incentives, dynamics and outcomes of delegated strategy decisions with social spillovers under endogenous incentives. The design builds on previous studies about contract design in gift-exchange experiments, and extends an existing design by allowing agents to make transfers between a charity and the principal. Agents are free to choose the direction of the transfer, i.e., they can transfer money from the principal to the charity ("donation"), as well as from the charity to the principal ("social damage"). Profit is defined as the sum of economic surplus and the transfer. As predicted by the gift-exchange hypothesis, the results show that principals make wage offers which share profits rather equally. Moreover, a large proportion of principals set profit targets which are feasible without transferring money from the charity. The results suggest that principals have a monetary incentive to hire selfish agents while the highest economic surplus is generated by prosocial agents. This contradicts the neoclassical claim that the economic surplus is maximized when agents maximize shareholder wealth.