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Moral Hazard Game


									Moral Hazard Game

  Managerial Economics
  Bruce Hartman
   You are either the Principal (Player 1) or the Agent (Player 2). The
    color of the piece of paper you are given tells you which you are.
    You have a starting endowment of some coins.
   The agent can supply goods of either low or high quality. The
    principal can either inspect or not. Payoffs (in coins) are indicated
    in the payoff table you will be given.
   Mingle about the room and find a partner of the opposite type. You
    may discuss the choice at will up to the time when you must record
    your choice along with your initials on the piece of paper.
   You must record your choice privately and simultaneously, and may
    not look at what the other partner is recording.
   Submit your record to the instructor, who will inform you of your
   A number of rounds will be played. Information conditions will vary
    for the rounds.
Payoff Table

                           Agent (2)

                       High      Low
                       Quality   Quality
             Inspect   1, 1      0, 0
             Inspect   2, -1     0, 0
    MicroLevel:Principles and up
    Subject(s):Economics of information
    Objective:Illustrates the moral hazard problems associated with
     principal-agent relationships.
    Reference and contact:Ortmann, Andreas and David Colander.                                  Player
     Experiments in Teaching and in Understanding Economics. Burr
     Ridge, IL: Irwin, 1995. (Experiment #6); and Ortmann, Andreas                               2
     and David Colander. "A Simple Principal-Agent Experiment for the
     Classroom." Economic Inquiry, 35(2), April 1997, pp. 443-450.
    Abstract:A one-sided prisoner's dilemma game is used to
     represent the strategic uncertainty where an agent can supply a
     good at either high quality or low quality, and a principal can either                      High      Low
     verify the quality at cost or trust the agent. Students are presented
     the following payoff table. The principal's (Player 1) payoffs are
     listed first.
                                                                                                 Quality   Quality
    sellers by giving each type a different colored piece of paper on
     which to record their decisions. Each player is given an
     endowment of one quarter (25 cents). The players are then told to        Player
     mingle about the room in search of a player of the opposite type.                  Don't
     Once located, the two players may discuss the optimal strategy of
     combination but they must record their choice privately (along with
                                                                                       Inspect   1, 1      0, 0
     their initials for identification purposes). Each pair then submits
     their choices to the instructor. The instructor then determines each
     player’s payoffs according to the matrix above: if the upper left
     corner is the outcome, give each player an additional quarter; if
     the lower left corner is the outcome, take the initial endowment
     from player 2 and give it to player 1, then give player 1 an
     additional quarter; if the lower right corner is the outcome, take no
     action. Ortmann and Colander claim that you will see about as
                                                                                       Inspect   2, -1     0, 0
     much cooperation in the one-sided game as in the more traditional
     two-sided game.
    Class size:Any even number of students.
    Time:30 – 45 minutes.
    Variations:The game could be repeated using different information
     conditions or the reputations of players could be kept secret or
    See also:Information games

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