Group Identity and the Moral Hazard Problem: Experimental Evidence
Article first published online: 15 OCT 2012
© 2012 Wiley Periodicals, Inc.
Journal of Economics & Management Strategy
Volume 21, Issue 4, pages 1061–1081, Winter 2012
How to Cite
Dugar, S. and Shahriar, Q. (2012), Group Identity and the Moral Hazard Problem: Experimental Evidence. Journal of Economics & Management Strategy, 21: 1061–1081. doi: 10.1111/j.1530-9134.2012.00350.x
- Issue published online: 15 OCT 2012
- Article first published online: 15 OCT 2012
We experimentally examine how real group identity of parties (a principal and an agent) facing a moral hazard problem may attenuate the problem and thereby implement the efficient outcome. We find that, the frequency of the efficient outcome is significantly higher when both parties share the same identity than when they do not. However, when we induce a substantially weaker form of identity or increase an outside-option payoff offered to the principal, the frequency of the efficient outcome diminishes considerably, even when the parties’ identities align perfectly. Our results have important implications for the design of nonpecuniary contract enforcement devices.