Fair share and social efficiency: A mechanism in which peers decide on the payoff division

We propose and experimentally test a mechanism for a class of principal-agent problems in which agents can observe each others' efforts. In this mechanism each player costlessly assigns a share of the pie to each of the other players, after observing their contributions, and the final distribution is determined by these assignments. We show that efficiency can be achieved under this simple mechanism and, in a controlled laboratory experiment, we find that players reward others based on relative contributions in most cases and that the players' contributions improve substantially and almost immediately with 80 percent of players contributing fully.