The influence of face-to-face communication: a principal-agent experiment

The principal-agent problem is an interesting problem involved in many everyday relationships, such as the one between company owners and their delegates. Our experiment simulates such a relationship, whereby the task of participating pairs is to negotiate labor contracts. Our aim is to find the effects of face-to-face communication and negotiation on contract framing. We argue that including pre-play communication into the principal-agent problem leads to a significant improvement of agent’s effort and results in changes of the compensation scheme. We show that incentives are not the only possibility to induce high effort. We use content analysis of the video-taped negotiations to find some characteristics of the communication process.