Punishment Incentives in Principal-Agent Dynamics: Insights from a Public Goods Game Experiment

Abstract

This paper experimentally investigates the impact of punishment on agents’ behavior in a principal-agent framework. The study focuses on agency problems that arise from conflicting incentive structures between principals (managers) and agents (employees). We aim to determine whether a punishment mechanism can reduce these agency problems and align agents’ actions with the principal’s objectives. In our experimental setup, managers, acting as principals, can use punishment to influence employees’ (agents’) efforts and decisions. The results indicate that punishment does affect employees’ choices, leading them to select projects with higher returns for the manager. However, the punishment mechanism does not fully achieve its intended effect, as managers cannot consistently influence the level of employee contributions.