The Realism of Self-Interested Opportunism: An Experimental Investigation of Learning, Fairness, and Ethics

Abstract

We examine the realism of the assumption of self-interested opportunism in agency theory. We place subjects into manager/producer pairs and set parameters so that the producer extracts the highest share of residual earnings from the manager by setting the budget at zero (100% slack) and providing low effort (shirking). Because the budget is public and effort is private, this setting allows us to examine two different forms of opportunism. To establish common knowledge of incentives, we give subjects extensive experience in both manager and producer roles. Finally, we manipulate pair rotation and the ability of the manager to reject the budget. Fully opportunistic levels of slack and shirking are not observed on average, and the two forms of opportunism differ systematically. With experience, subjects learn to build more slack into their budget but do not shirk more. Fairness concerns reduce both forms of opportunism but ethics concerns reduce shirking only. Subject rotation increases shirking but has no effect on slack. While rejection power reduces slack, it also increases shirking with all variables in the model. We discuss the implications of these results for theory and practice.