Recursive contracts, firm longevity, and rat races: An experimental analysis

Peter Bardsley, Nisvan Erkal, Nikos Nikiforakis, Tom Wilkening

Research output: Contribution to journalArticlepeer-review

Abstract

This paper reports the results from a laboratory experiment which investigates the structure of contracts that emerge in overlapping-generation firms where future ownership is a perquisite of employment. Workers in the young generation are offered employment contracts designed by the firms' owners who belong to the old generation. When old, employed workers are granted ownership rights as long as the firm continues to operate. In line with theoretical predictions, the results indicate that as firm longevity increases, the recursive nature of the contracts leads to a rat race characterized by low wages, high effort levels, and rent dissipation. These results have important implications for the optimal management of long-lived firms such as partnerships.

Original languageEnglish (US)
Pages (from-to)217-231
Number of pages15
JournalEuropean Economic Review
Volume61
DOIs
StatePublished - Jul 2013

Keywords

  • Experiments
  • Overlapping-generations models
  • Rat races
  • Recursive contracts

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Recursive contracts, firm longevity, and rat races: An experimental analysis'. Together they form a unique fingerprint.

Cite this