On the bad reputation of reputational concerns

Can reputational concerns do any good? Economists have shown how they lead agents to ignore valuable information, to herd, and to become overly risk averse. We explore how they may be a social blessing. An agent may exert effort to become informed about the uncertain benefits of a project. A smart agent's efforts make him better informed; a dumb agent's efforts are to no avail. If an agent does not know his type, reputational concerns are socially beneficial. If an agent knows his type, reputational concerns may be socially beneficial. A dumb agent takes inefficient, unconventional decisions to mimic a smart agent. The latter exerts more effort in order not to be mistaken for a dumb. This holds whether or not project rejection is a safe haven for the dumb.     

On the optimality of privacy in sequential contracting

This paper studies the exchange of information between two principals who contract sequentially with the same agent, as in the case of a buyer who purchases from multiple sellers. We show that when (a) the upstream principal is not personally interested in the downstream level of trade, (b) the agent's valuations are positively correlated, and (c) preferences in the downstream relationship are separable, then it is optimal for the upstream principal to offer the agent full privacy. On the contrary, when any of these conditions is violated, there exist preferences for which disclosure is strictly optimal, even if the downstream principal does not pay for the information. We also examine the effects of disclosure on welfare and show that it does not necessarily reduce the agent's surplus in the two relationships and in some cases may even yield a Pareto improvement.     

Discretionary rewards as a feedback mechanism

This paper studies the use of discretionary rewards in a finitely repeated principal–agent relationship with moral hazard. The key aspect is that rewards have informational content. When the principal obtains a private subjective signal about the agent's performance, she may pay discretionary bonuses to provide credible feedback to the agent. In accordance with the often observed compression of ratings, we show that in equilibrium the principal communicates the agent's interim performance imperfectly, i.e., she does not fully differentiate good and bad performance. Furthermore, we show that small rewards can have a large impact on the agent's effort, provided that the principal's stake in the project is small.     

Competition between asymmetrically informed principals

Summary. This paper derives the set of equilibria for common agency games in which the principals compete in piece rates and lump sum payments and one principal has incomplete information about the agent's preferences. We show that the uninformed principal's expected payoff function is discontinuous with respect to the identity of the marginal agent type. This discontinuity is shown to support an open set of equilibria. For games in which the first-best equilibrium strategies are measurable with respect to the uninformed principal's information partition, this result implies the existence of an open set of Pareto inefficient equilibria. Received: December 5, 1995; revised version August 18, 1996     

A Continuous-Time Version of the Principal–Agent Problem

This paper describes a new continuous-time principal–agent model, in which the output is a diffusion process with drift determined by the agent's unobserved effort. The risk-averse agent receives consumption continuously. The optimal contract, based on the agent's continuation value as a state variable, is computed by a new method using a differential equation. During employment, the output path stochastically drives the agent's continuation value until it reaches a point that triggers retirement, quitting, replacement, or promotion. The paper explores how the dynamics of the agent's wages and effort, as well as the optimal mix of short-term and long-term incentives, depend on the contractual environment.     

Correlated information, mechanism design and informational rents

Crémer and McLean (Econometrica 56 (1988) 1247-1258) obtain a sufficient and necessary condition for full surplus extraction in Bayesian-Nash equilibrium—the rank condition, which McAfee and Reny (Econometrica 60(2) (1992) 395-421) later generalize for continuous type spaces. This paper shows that, if the principal does not know how noisy is the agent's signal—or equivalently, when signals available to an agent can be ranked by Blackwell's informativeness and, an agent's informativeness is independent of others’ information, the rank condition fails to hold. Conversely, when rank condition fails and informational rents are left to an agent, the model can be interpreted as if, the principal were uncertain about the informativeness of the agent's signal.     

Fairness and Incentives in a Multi‐task Principal–Agent Model

This paper reports on a two‐task principal–agent experiment in which only one task is contractible. The principal can either offer a piece‐rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece‐rate contracts. Many principals reward high effort on both tasks with substantial bonuses. Agents anticipate this and provide high effort on both tasks. In contrast, almost all agents with a piece‐rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the self‐interest theory but is consistent with theories of fairness.     

Negotiation and take it or leave it in common agency

This paper contrasts models of common agency in which principals compete in incentive contracts (that is, they make take it or leave it offers) with models where principals offer agents menus of incentive contracts from which the final contract is negotiated. It is shown that pure strategy equilibria in incentive contracts are robust to the possibility that principals might offer menus. In addition, a no-externalities condition is given such that any pure strategy equilibrium allocation with menus can be supported with competition in incentive contracts. The no-externalities condition is restrictive, but it is shown that it applies in most well-known common agency problems, including, for example, the Bertrand pricing problem.     

On the Non-Contractual Nature of Donor–Recipient Interaction in Development Assistance

The author analyzes three issues in strategic donor–recipient interaction motivated by the complexity of the rationale underlying aid. The first is when we have several principals with conflicting objectives. Any one principal cannot offer high powered incentives to the agent to carry out his or her designated task. The second is to do with the fact that effort associated with ensuring aid effectiveness may concern both principal and agent, the optimal solution to which requires cooperative behavior that is difficult to design. Consequently, the contractual type principal–agent relationship between donors and recipients is inappropriate. We need to consider models that signal recipient quality or commitment to reform. Thus, thirdly, a simple model of signaling with commitment problems is presented, along with extensions to multiple types of agent and time periods, as well as possible solutions involving mechanism design.     

Optimal Delegation

We analyse the design of decision rules by a principal who faces an informed but biased agent and who is unable to commit to contingent transfers. The contracting problem reduces to a delegation problem in which the principal commits to a set of decisions from which the agent chooses his preferred one. We characterize the optimal delegation set and perform comparative statics on the principal's willingness to delegate and the agent's discretion. We also provide conditions for interval delegation to be optimal and show that they are satisfied when the agent's preferences are sufficiently aligned. Finally, we apply our results to the regulation of a privately informed monopolist and to the design of legislatives rules.     

The Economics of Clear Advice and Extreme Options

I study a principal–agent model in which the agent collects information and then chooses a verifiable action. I show that the principal can find it desirable to constrain the agent's action set even though there is no disagreement about the ranking of actions ex post . The elimination or penalization of „intermediate” actions, which are optimal when information is poor, improves incentives for information collection. I characterize optimal action sets when the agent is infinitely risk averse with respect to income shocks and optimal incentive schemes when the agent is risk neutral.     

Wealth Effects, Incentives, and Productivity

Comparative static effects of varying the wealth level of a risk-averse agent in a moral hazard setting with limited liability constraints are investigated. There are two principal opposing effects of increasing wealth: the incentive effect, which allows stronger punishments for poor performance, thereby encouraging higher effort; and the preference effect, which reduces the agent's effort incentives owing to income effects in the demand for leisure. It is shown that optimal effort levels are initially constant, subsequently increasing and eventually decreasing in wealth. Hence agents with intermediate wealth levels are the most productive.     

Mechanism design with collusive supervision

We analyze an adverse selection environment with third party supervision. The supervisor is partly informed of the agent's type. The supervisor and the agent collude while interacting with the principal. Contracting with the agent directly and ignoring the presence of the supervisor constitutes the no-supervision benchmark. We show that delegating to the supervisor reduces the principal's payoff compared to the no-supervision benchmark under a standard condition on the distribution of the agent's types. In contrast, if the principal contracts with both the agent and the supervisor, there exists a mechanism that improves the principal's payoff over the no-supervision payoff.     

Performance of municipally owned corporations: Determinants and mechanisms

Practitioners often expect service delivery by municipally owned corporations (MOCs) to differ substantially from delivery by municipal bureaucracy. However, research into the circumstances under which municipal corporatization is effective is scarce. We investigate determinants of MOCs’ performance based on a questionnaire sent to all Dutch MOCs, finding no evidence that many expected predictors of performance matter for performance. Key factors driving MOCs’ performance relate to size, resource access, and the interaction between their multiple principals. We suggest that in studying local corporatization, researchers should look less at traditional principal–agent conflict and more at intermunicipal coordination.     

Why it Pays to Conceal: On the Optimal Timing of Acquiring Verifiable Information

Abstract. We consider optimal contracts when a principal has two sources to detect bad projects. The first one is an information technology without agency costs (IT_P), whereas the second one is the expertise of an agent subject to moral hazard, adverse selection and limited liability (IT_A). First, we show that the principal does not necessarily benefit from access to additional information and thereby may prefer to ignore it. Second, we discuss different timings of information release, i.e., a disclosure contract offered to the agent after the principal announced the result of IT_P , and a concealment contract where the agent exerts effort before IT_P is checked. We find that concealment is superior whenever the quality of IT_P is sufficiently low. Then, IT_P is almost worthless under a disclosure contract, while it can still be exploited to reduce the agent's information rent under concealment. If the quality of IT_P improves, disclosure can be superior as it allows to adjust the agent's effort to the updated expected quality of the project. However, even for a highly informative IT_P , concealment can be superior as it mitigates the adverse selection problem.     

Optimal Contracting of Separable Production Technologies

We analyze the class of agency problems with a risk-neutral principal and a risk-averse agent, in which hidden actions and hidden information (on the agent's efficiency) are jointly present. Technological assumptions such as monotonicity of likelihood are no longer sufficient for the optimal contract to be monotone in the sharing rule. We show that these regularity properties obtain for the rather wide class of production technologies that are separable in the agent's inputs. Together with ordinal properties such as monotone differences and affiliation of inputs, separability yields the monotonicity in efficiency of the agent's actions and indirect utility.     

Hidden information,bargaining power,and efficiency: an experiment

We devise an experiment to explore the effect of different degrees of bargaining power on the design and the selection of contracts in a hidden-information context. In our benchmark case, each principal is matched with one agent of unknown type. In our second treatment, a principal can select one of three agents, while in a third treatment an agent may choose between the contract menus offered by two principals. We first show theoretically how different ratios of principals and agents affect outcomes and efficiency. Informational asymmetries generate inefficiency. In an environment where principals compete against each other to hire agents, these inefficiencies may disappear, but they are insensitive to the number of principals. In contrast, when agents compete to be hired, efficiency improves dramatically, and it increases in the relative number of agents because competition reduces the agents’ informational monopoly power. However, this environment also generates a high inequality level and is characterized by multiple equilibria. In general, there is a fairly high degree of correspondence between the theoretical predictions and the contract menus actually chosen in each treatment. There is, however, a tendency to choose more ‘generous’ (and more efficient) contract menus over time. We find that competition leads to a substantially higher probability of trade, and that, overall, competition between agents generates the most efficient outcomes.     

多层科层中的最优序贯授权与"一刀切"政策

沿袭Tirole(1986)的委托人-中间人-代理人科层结构,本文研究了当委托人不能直接管理代理人时的最优序贯授权问题。在该授权博弈中,委托人通过审慎设计中间人职权范围,影响其对代理人的授权行为,从而激励代理人更有效地提供和使用信息。我们发现,当下属之间利益偏差方向一致时,即中间人较委托人更愿意扩大代理人权限时,采用文献中常关注的"区间授权"(Holmstrom,1977)形式,委托人可以实现其直接向代理人授权时的最优结果。但是,如果下属间利益偏差方向相反,即中间人希望减小代理人权限时,"区间授权"将不再是最优。为了更好地影响控制中间人向代理人的次第授权行为,在最优序贯授权方案中委托人将移除部分中间选项。移除选项数目的多少取决于中间人的利益偏差程度。同授权与激励方面的文献不同,本文表明,即使在信息结构给定的条件下,移除中间项将作为科层中的控制工具,成为最优授权方案的一个特征。本文的发现从激励和授权角度对现行的一些法规执行实践中的"一刀切"政策(比如,"醉驾入刑"、大学招生录取等)提供了一些解释。     

多层科层中的最优序贯授权与"一刀切"政策

沿袭Tirole(1986)的委托人一中间人一代理人科层结构,本文研究了当委托人不能直接管理代理人时的最优序贯授权问题。在该授权博弈中,委托人通过审慎设计中间人职权范围,影响其对代理入的授权行为,从而激励代理人更有效地提供和使用信息。我们发现,当下属之间利益偏差方向一致时,即中间人较委托入更愿意扩大代理人权限时,采用文献中常关注的“区间授权”(Holm—strom,1977)形式,委托人可以实现其直接向代理人授权时的最优结果。但是,如果下属间利益偏差方向相反,即中间人希望减小代理人权限时,“区间授权”将不再是最优。为了更好地影响控制中间人向代理人的次第授权行为,在最优序贯授权方案中委托人将移除部分中间选项。移除选项数目的多少取决于中间人的利益偏差程度。同授权与激励方面的文献不同,本文表明,即使在信息结构给定的条件下,移除中间项将作为科层中的控制工具,成为最优授权方案的一个特征。本文的发现从激励和授权角度对现行的一些法规执行实践中的“一刀切”政策(比如,“醉驾入刑”、大学招生录取等)提供了一些解释。