Effects of Competitive Pressure on Principal-Agent Relationships: An Experimental Investigation ∗

Abstract

This paper analyzes the effects of competitive pressure among agents on principalagent relationships. We examine both situations where competitive pressure is valuable for the principal from a theoretical perspective and situations where it is not. Our results show that competitive pressure significantly affects both effort levels and surplus sharing in principal-agent relationships. In particular, even if competitive pressure should not have any effect from a theoretical point of view, effort levels significantly increase and surplus sharing is significantly shifted towards the principal. This suggests that the perception of what is a ‘fair’ contract offer shifts under situations of competitive pressure. However, within a given treatment, agents’ effort choices are influenced by reciprocal considerations both in settings with competitive pressure and without.