Safety regulation and monitor liability

We propose a simple liability rule when several agents are jointly responsible for monitoring a risky economic activity or certifying its security. Examples are safety controls for drugs or technical systems, environmental liability, or air safety accidents. The agents have private knowledge of their monitoring or avoidance costs. We adopt a mechanism design approach to ensure optimal monitoring incentives. Our innovation is to focus on information that is available or can be proxied when harm has occurred and when typically regulators and/or courts deliberate over fines and damages. By contrast, earlier proposals require more estimations of hypothetical accident scenarios and their ex ante probabilities. We argue that our rule promises substantial savings in information costs for courts and regulators and excludes likely sources of errors. Received: 11 October 2000 / Accepted: 14 September 2001 We are grateful to Doug Bernheim, Lewis Kornhauser, Kai-Uwe Kühn and an anonymous referee for helpful comments and discussions, and to an associate editor in particular for very valuable suggestions. Financial support from the European Commission (TMR Grant ERBFMBICT 972827) and from Thyssen Foundation is gratefully acknowledged.     

Introduction to the Symposium on Tournaments,Contests, and Relative Performance Evaluation

The papers in this symposium reflect several of the directions taken by current research on tournaments, contests and relative performance evaluation. The papers help us understand the implications of agent heterogeneity on the incentives of agents to perform or self‐select the offers designed for them. They encompass various issues such as career concerns and promotion incentives, interim disclosure of information obtained by the principal about agent performance, exposure to risk choices, and competing for talent.     

Trust in Agency

Existing models of the principal–agent relationship assume the agent works only under extrinsic incentives. However, many observed agency contracts take the form of a fixed payment. For such contracts to work, the principal must trust the agent to work in the absence of incentives. I show that agency fosters the advent of intrinsic motivation and trustworthy behavior. Three distinct motivational schemes are analyzed: norms, ethical standards, and altruism. I identify conditions under which these mechanisms arise and show how they promote trust. The analysis alters several important predictions of conventional models: (1) Better outcomes may ensue in highly uncertain environments; (2) the principal is better off the more the agent is risk averse; and (3) larger equilibrium extrinsic incentives need not be associated with larger effort or larger total surplus .     

Portfolio choice,behavioral preferences and equity home bias

We provide a plausible explanation of aggregate portfolio behavior, in a framework where economic agents have behavioral (narrow framing) preferences. The representative agent derives utility not only from consumption (standard models) but also from risky financial wealth fluctuations. Moreover, the investor frames the stock market risk narrowly and has loss averse preferences. We numerically solve, for the foreign equity share, a simple model of international portfolio choice, providing a possible explanation for the equity home bias puzzle. Only economic agents able to process correctly information deriving from stock markets exploit the diversification opportunities provided by international financial markets.     

Remedying Illegal Actions of Judgment Proof Injurers Via Contracts,Fines and Sanctions

This paper studies the impact of the judgment proof problem on the design of incentives to prevent illegal behavior when the principal delegates a risky production activity to the agent in the presence of moral hazard and adverse selection. The agent can reduce costs by engaging in an illegal action that generates liability. When insolvency is endogenously determined, the principal neither provides incentives to the agent to induce a fully legal action nor designs a contract that makes either party insolvent. The social optimum can be achieved by a fine or non‐monetary sanction. If the fine cannot correct inefficiency, non‐monetary sanction achieves the social optimum by the fully legal action. Copyright © 2013 John Wiley & Sons, Ltd.     

Brokers’ contractual arrangements in the Manhattan residential rental market

We bring new evidence to bear on the role of intermediaries in frictional matching markets and on how parties design contracts with them. Specifically, we examine two features of contracts between landlords and agents in the Manhattan residential rental market. In our data, 72 percent of listings involve exclusive relationships between landlords and agents (the remaining 28 percent are non-exclusive); and in 21 percent of listings, the landlord commits to pay the agent’s fee (in the other 79 percent, the tenant pays the agent’s the fee). Our analysis highlights that these contractual features reflect landlords’ concerns about providing agents with incentives to exert effort specific to their rental units and to screen among heterogeneous tenants.     

Counting Groves-Ledyard equilibria via degree theory

We study the Groves-Ledyard mechanism for determining optimal amounts of public goods in economies whose agents have the most general class of preferences for which a Pareto amount of public goods can be computed independently of income distribution. We use degree theory on affine spaces to show that the number of equilibria in such economies grows exponentially as the number of agents in the economy increases. The large number of equilibria in such simple economic models raises doubts as to whether the Groves-Ledyard mechanism is a workable solution to the Free Rider Problem since individuals may have incentives to falsify their preferences in order to drive the adjustment process to a preferred Nash equilibrium.     

The incidence and persistence of corruption in economic development

Economic development and bureaucratic corruption are determined jointly in a dynamic general equilibrium model of growth, bribery and tax evasion. Corruption arises from the incentives of public and private agents to conspire in the concealment of information from the government. These incentives depend on aggregate economic activity which, in turn, depends on the incidence of corruption. The model produces multiple development regimes, transition between which may or may not occur. In accordance with recent empirical evidence, the relationship between corruption and development is predicted to be negative.     

Information Management and Incentives

We ask how the incentives of an agent are affected by an information management system that lets the agent receive information about the performance of a colleague before (“transparent firm”) rather than after he provides effort (“nontransparent firm”). Transparency is detrimental for incentives if the performance of the colleague provides information on the relative impact of the agent’s effort on his success probability. The findings imply that firms in which comparisons between employees play a minor role for compensation are transparent. Firms in which they play a major role sometimes choose to be nontransparent despite the flexibility gains transparency provides.     

Incentives in academics: Collaboration under weak complementarities

This paper considers a contracting relationship with multiple agents in a repeated setting under voluntary team formation. In each period, an opportunity to collaborate arrives stochastically but whether this opportunity has arrived is the agents' private information. The principal thus cannot simply tell them when to collaborate; she must instead guide them through incentives. The optimal contract in the repeated setting can drastically be different from that in the static setting and is often characterized as high-powered team incentives complemented with inefficiently low-powered individual incentives, which endogenously raise the cost of shirking. We then argue that low-powered incentives offered for non-collaborative works, as often observed in our profession, can be seen as an important part of optimal incentive schemes in an attempt to endogenously raise the cost of shirking. The mechanism presented here also has implications for internal team competition (team competition within firms) which has become increasingly popular these days.     

Cross-functional alignment in supply chain planning: A case study of sales and operations planning

In most organizations, supply chain planning is a cross-functional effort. However, functional areas such as sales, marketing, finance, and operations traditionally specialize in portions of the planning activities, which results in conflicts over expectations, preferences, and priorities. We report findings from a detailed case analysis of a supply chain planning process that seemingly weathers these cross-functional conflicts. In contrast to traditional research on this area, which focuses on incentives, responsibilities, and structures, we adopt a process perspective and find that integration was achieved despite formal functional incentives that did not support it. By drawing a distinction between the incentive landscape and the planning process, we identify process as a mediator that can affect organizational outcomes. Thus, organizations may be capable of integration while functions retain different incentives and orientations to maintain focus on their stakeholders’ needs. Through iterative coding, we identify the attributes of the planning process that can drive planning performance—information, procedural, and alignment quality—but also find evidence that achieving alignment in the execution of plans can be more important than informational and procedural quality. In addition to process attributes, we also identify social elements that influenced the performance of the planning process and place the information processing attributes within a broader social and organizational context.     

A cognitive hierarchy model of learning in networks

This paper proposes a method for estimating a hierarchical model of bounded rationality in games of learning in networks. A cognitive hierarchy comprises a set of cognitive types whose behavior ranges from random to substantively rational. Specifically, each cognitive type in the model corresponds to the number of periods in which economic agents process new information. Using experimental data, we estimate type distributions in a variety of task environments and show how estimated distributions depend on the structural properties of the environments. The estimation results identify significant levels of behavioral heterogeneity in the experimental data and overall confirm comparative static conjectures on type distributions across task environments. Surprisingly, the model replicates the aggregate patterns of the behavior in the data quite well. Finally, we found that the dominant type in the data is closely related to Bayes-rational behavior.     

基于委托代理的区域高校协作激励机制设计

区域化的经济发展为区域高等院校协作提供了现实需求,加强高等教育区域协作已经成为必要,而如何设计有效的激励机制是协作成功与否的关键。本文通过建立地方政府和高校之间的协作机制模型,研究了我国区域高等院校协作中的委托代理问题和激励机制设计问题,并通过对模型的优化得到相应的激励机制。     

Agency Problems and Commitment in Delegated Bargaining

In the context of (one-sided) delegated bargaining, we analyze how a principal (a seller) should design the delegation contract in order to provide proper incentives for her delegate (an intermediary) and gain strategic advantage against a third party (a buyer). We consider situations in which there are both moral hazard and adverse selection problems in the delegation relationship and where the seller tries to gain strategic advantage by imposing a minimum price above which she pays the delegate a commission. It is shown that incentives and commitment are substitutes. A low-type agent is given less discretion in dealing with the buyer and weaker incentives, while a high-type agent is given more discretion and stronger incentives .     

Behavioural Economics: A Virginia Political Economy Perspective

Behavioural economics offers a critique of modern neoclassical economics by providing empirical evidence that the model of rational choice does not accurately describe human decision‐making processes. The existence of cognitive biases, what we might term ‘agent failure’, becomes reason to doubt the efficacy of unhampered markets, and is seen by some as a sufficient condition for government intervention. This article offers a critique of this argument from an Austrian and public choice theory comparative institutions perspective. Agent failure arguments are analogous to market failure arguments of the mid‐twentieth century and the same kinds of responses made against the latter are applied to the former. Behavioural economics arguments for intervention ignore the cognitive biases of political actors, neglect the comparative perspective that results from such biases, and do not examine the ways in which markets are superior to politics in providing the information and incentives actors need to become aware of their errors and correct them. The existence of imperfectly rational agents, like the existence of imperfect markets, is therefore not a sufficient condition for government intervention into the market.     

Switching from complete to incomplete information

We construct an elementary mechanism [Dutta, B., Sen, A., Vohra, R., 1995. Nash implementation through elementary mechanisms in economic environments. Review of Economic Design 1, 173–203] that Nash implements the constrained Walrasian correspondence. We extend it to incomplete and non-exclusive information economies by enlarging the message space of agents. In addition, measurability restrictions on allocations with respect to prices proper to constrained rational expectations equilibria are imposed in the outcome function. We show that by imposing such restrictions, the mechanism Bayesian implements the constrained rational expectations equilibrium correspondence. This result shows game-theoretic connections between these two market equilibrium concepts. However, these connections are obtained at the price of strong restrictions on the behavior of agents.     

Network Incentives in Managed Health Care

This paper introduces a theory of network incentives in managed health care. Participation in the plan's network confers an economic benefit on providers; in exchange, the plan expects compliance with its protocols. The network sets a target for the number of outpatient visits in an episode of care. A provider failing to satisfy the target may be penalized by the plan's attempt to direct patients to other providers within its network. There is an equilibrium in which every provider in the network uses the target. We test the theory by observing behavior of providers before and after the introduction of managed mental health care in a large, employed population. Managed care consisted of price reductions, utilization review, and creation of a network. Quantity per episode of care fell sharply after initiation of managed care. We identify a network effect in our empirical work. The results indicate that in this case, network incentives account for most of the quantity reduction due to managed care.     

Implementation and information in teams

A risk-neutral principal hires risk-averse agents to work in a team production process. Each agent can observe the actions taken by some subset of the other agents, and (perhaps) the realization of a random variable which is correlated with output. The principal cannot observe actions or the random variable. However, the agents can communicate with the principal, and final output is verifiable. We characterize the information structures that make it possible for the principal to implement his first best. In general it will be desirable to restrict the information available to the agents. If the first best can be implemented, then it can be implemented by a very simple mechanism, in which each agent forecasts the team output, but sends no other message.     

Countervailing incentives in allocation mechanisms with type-dependent externalities

I study an allocation mechanism of a single item in the presence of type-dependent externalities between bidders. The type-dependency introduces countervailing incentives and the allocation sometimes requires that types in an interior subset obtain their reservation utility. Furthermore, truth-telling requires the ex-ante allocation to satisfy a non-trivial monotonicity condition. I show that this problem is technically different from the one analyzed in related single agent settings. I provide a procedure to identify the main properties of the ex-post allocation. Typically, the solution does not entail a single reserve price. More specifically, each agent faces an allocation rule contingent on whether his and his rival’s types fall below, in or above the (endogenously determined) subset of types that obtain their reservation utility.