Building a pathway to cooperation: Negotiation and social exchange between principal and agent

This paper examines contracting between a principal and an agent from the perspective of both social exchange theory and rational choice theory. Two experiments were conducted that tested competing predictions from the two theories. The first study examined effort decisions made by an agent under a series of contracts that varied in social context and compensation structure. The second experiment examined the negotiation of a compensation scheme between a principal and an agent and the agent's subsequent contract fulfillment, to test the mediating effects of verbal communication between parties on contracting and contract fulfillment. Both studies yielded results consistent with social exchange theory. Exchange theory appears to provide a better basis for deriving principles of organization design than rational choice.