In the gift exchange game, an incentive-based contract is one where:
A) The principal stipulates a wage for effort but also invests in a monitoring technology that can catch the agent, with some probability, if the latter shirks.
B) The principal stipulates a wage for effort and relies on the worker's reciprocity to fulfil the effort asked for.
C) The principal can perfectly monitor the agent and punish the agent in the event of shirking.
D) The principal and the agent rely on mutual trust and reciprocity in order to achieve an efficient outcome.

Question

Quizplus · Accepted Answer

BIncentive-based contracts are designed to motivate the agent to act in the principal's best interest by aligning the agent's incentives with those of the principal. Choice A describes a scenario where the principal uses a combination of wage incentives and monitoring to encourage effort, which fits the concept of an incentive-based contract. Choice B describes a situation where the principal relies on the agent's sense of reciprocity, offering a wage in the hope that the agent will reciprocate with effort, which is another form of incentive alignment. Choices C and D do not specifically describe incentive-based mechanisms but rather perfect monitoring and mutual trust, respectively, which are different concepts.

In the Gift Exchange Game, an Incentive-Based Contract Is One