Combinatorial agency

We study a combinatorial variant of the classical principal-agent model. In our setting a principal wishes to incentivize a team of strategic agents to exert costly effort on his behalf. Agents? actions are hidden and the principal observes only the outcome of the team, which depends stochastically on the complex combinations of the efforts by the agents. The principal seeks the mechanism that maximizes the principal?s net revenue given an equilibrium behavior of the agents. We investigate the structure of the optimal mechanism for various production technologies as the principal?s value from the project varies. In doing so we quantify the gap between the first-best and second-best solutions. Our results highlight the qualitative and quantitative differences between production technologies that exhibit complementarities and substitutabilities between the agents? actions. In comparing the first best with the second best we highlight the role of effort monitoring by the principal. As we shall see, the benefit from monitoring crucially depends on the underlying technology, with the two polar cases being perfect substitution and perfect complementarity.     

Moral Hazard and Renegotiation with Multiple Agents

We investigate the effects of contract renegotiation in multi-agentsituations where risk-averse agents negotiate a contract offer to theprincipal after the agents observe a common, unverifiable perfect signalabout their actions. We show that renegotiation with multiple agentsreduces the cost of implementing any implementable action profile downto the first-best level, even though the principal cannot observe theagents' actions. Moreover, it is sufficient for the principal to use a"simple" initial contract, in the sense that it consists of nomore than a single sharing scheme for each agent and the total payments tothe agents are the same regardless of the realised state. An importantimplication is that decentralization, in the sense of delegated negotiationand proposals from the agents, can be as effective as centralized schemesthat utilize revelation mechanisms in unrestricted ways.     

Adverse selection under ignorance

Summary. We examine an adverse selection relationship in which the principal may ignore the ex ante distribution of the agent's types. The principal's behavior is described by a disutility function that covers the standard minimax regret and minimax loss criteria. We show that the incentive compatible and individually rational mechanism, which minimizes the maximal (or the minimal) principal's disutility over a set of priors, requires the efficient agents to realize the corresponding first-best actions and may demand actions lower than the first-best ones from less efficient agents. We also analyze the qualitative differences between the case in which the principal considers regrets and the case in which he considers losses. Received: 19 October 1998; revised version: 9 November 1999     

Dynamic yardstick mechanisms

This paper shows that the inability of principals to commit to long-term contracts is irrelevant when dealing with several agents whose private information is correlated. This sharply contrasts with the dynamics of contracting without such correlation. The paper also explores what limitations on yardstick mechanisms can justify the use of long-term contracts. We found that the inability of a principal to commit not to renegotiate long-term contracts is without consequence even if there is a bound on transfers that an agent can be asked to pay. In contrast, short-term contracting fails to implement the commitment solution with constraints on transfers. Second, absent current yardstick, the possibility of using correlated mechanisms in the future allows the principal to implement the first-best with a renegotiation-proof long-term contract whereas this cannot be achieved with short-term contracting.     

Education, corruption, and the distribution of income

We examine how the interaction between education and corruption affects institutional reform and economic development. While corruption reduces average income and education, education increases not only output and hence potential corruption rents, but also produces more informed electorates that better monitor government actions. We find that economies with intermediate levels of education remain in a poverty trap since the level of skills creates sufficient corruption rents but not enough monitoring. Economies with low or high levels of education can escape the poverty trap, and inequality plays a key role in determining whether this occurs through a change in institutions or an expansion of education.     

Collusion, Delegation and Supervision with Soft Information

This paper shows that supervision with soft information is valuable whenever supervisors and supervisees collude under asymmetric information and proceeds then to derive an Equivalence Principle between organizational forms of supervisory and productive activities. We consider an organization with an agent privately informed on his productivity and a risk averse supervisor getting signals on the agent's type. In a centralized organization, the principal can communicate and contract with both the supervisor and the agent. However, these two agents can collude against the principal. In a decentralized organization, the principal only communicates and contracts with the supervisor who in turn sub-contracts with the agent. We show that the two organizations achieve the same outcome. We discuss this equivalence and provide various comparative statics results to assess the efficiency of supervisory structures.     

On the design of optimal grandfathering schemes for emission allowances

This paper derives optimal schemes for the free allocation of emission allowances in a dynamic context. We consider emissions- and output-based allocation rules which allow for updating of the basis of allocation over time and thereby do not rely on historical data only. We show that such dynamic schemes do not necessarily induce inefficient outcomes. In closed trading systems with an absolute cap on emissions, grandfathering schemes which allocate allowances proportionally to past emissions are first-best. However, in open trading systems where allowances can be traded with outsiders, first-best allocation schemes must not depend on firm-specific decisions while second-best schemes correspond to a Ramsey rule of optimal tax differentiation and are generally based on both past emission and output levels.     

A model of boundedly rational “neuro” agents

We consider a model in which each agent in a population chooses one of two options. Each agent does not know what the available options are and can choose an option only after observing another agent who has already chosen that option. In addition, the agents’ preferences over the two options are correlated. An agent can either imitate an observed agent or wait until he meets two agents who made different choices, in which case he can compare their choices and choose accordingly. A novel feature of the model is that agents observe not only the choices made by others, but also some information about the process that led them to those choices. We study two cases: In the first, an agent notes whether the observed agent imitated others or whether he actually compared the available alternatives. In the second, an agent notes whether the observed agent’s decision was hasty or not. It is shown that in equilibrium the probability of making a mistake is higher in the second case and that the existence of these nonstandard “neuro” observations systematically biases the equilibrium distribution of choices.     

Mixed up? that’s good for motivation

We show that career concerns can arise in the absence of ex ante uncertainty about an agent’s type, if his unobservable actions influence future productivity. Implementing effort in mixed strategies allows the principal to endogenously introduce uncertainty about the agent’s ex post productivity and generate reputational incentives. Creating such ambiguity can be optimal for the principal, even though this exposes the agent to additional risk and reduces output. This finding for an environment with imperfect commitment contrasts with standard agency models, where implementing mixed strategy actions typically is not optimal if pure strategies can also be implemented.     

Rank-order tournaments and selection

Rank-order tournaments are often presented as devices for aligning incentives in a principal-agent setting. In most of this literature agents are expected to be identical so that the principal is indifferent ex ante as to who wins the contest, implying that the selection properties of the tournament can be ignored. In this paper we consider a tournament which is not necessarily symmetric, and in which agent type is private information. The principal cares about who wins, but the basic tournament will not achieve perfect selection; the lower-type agent may sometimes win. In a two-player tournament we present a simple reward system in which the winner's reward depends upon which (if any) of two “test standards” is passed; conditions are presented under which this system allows the principal to choose the best agent. This system can be extended in a simple manner to rank types in ann-player tournament. We suggest that the theory can be applied to internal labor markets and research contests.     

Interactive team reasoning: A contribution to the theory of co-operation

This paper describes interactions between agents who sometimes choose as individuals and sometimes as members of teams. Choosing as a member of a team entails not only being motivated by the team's objective, but also a distinctive pattern of reasoning: an agent who “team reasons” computes, and chooses her component in, aprofile evaluated using the team's objective function. It is not assumed that a given agent team reasons for a particular team; there may be more than one team, and which she reasons for is here treated probabilistically. Ordinary reasoning is a special case in which the team is a singleton. The framework therefore encompasses interactions paradigmatic in the theory of co-operative behaviour in which agents may choose either for the group of for themselves. The hypothesis that people may team reason if and when they are group motivated can, it is shown, explain some puzzling aspects of co-operative behaviour in a new way.     

Maximizing social welfare in congestion games via redistribution

It is well known that efficient use of congestible resources can be achieved via marginal pricing; however, payments collected from the agents generate a budget surplus, which reduces social welfare. We show that an asymptotically first-best solution in the number of agents can be achieved by the appropriate redistribution of the budget surplus back to the agents.     

Social welfare for an economy of angelic agents

This paper analyzes an economy in which all agents are pursuing the common good (or social welfare) but choices are decentralized, i.e., each agent can choose his/her action in the set of the actions that he/she can perform. One wonders if it is enough the common goal of maximizing social welfare to their will be achieved. The paper examines both the cases in which the choice made by each agent does not directly influence those of other agents, as in the competitive equilibrium analysis, and the case in which there is a direct influence, as in the game theory analyses. In the first case, we get that the common goal of maximizing social welfare is not enough to reach it, but it is necessary to coordinate the actions of individual agents by extending information to redistribute initial endowments and by introducing an appropriate social organization. We get the maximum social welfare without further intervention for the cases describable with the theory of games, but only for games of complete information. If the information is incomplete, some further coordination is generally required.     

Contract renegotiation and options in agency problems

This article discusses the ability of an agent and a principalto achieve the first-best outcome when the agent invests inan asset that has greater value if owned by the principal thanby the agent. When contracts can be renegotiated, a well-knowndanger is that the principal can hold up the agent, underminingthe agent's investment incentives. We begin by identifying acountervailing effect: Investment by the agent can increasehis value for the asset, thus improving his bargaining positionin renegotiation. We show that option contracts will achievethe first best whenever his threat-point effect dominates theholdup effect. Otherwise, achieving the first best is difficultand, in many cases, impossible.     

Decentralized decision-making in a large team with local information

We study a problem involving a team of agents each associated with a node in a chain. Each agent makes a decision that influences only his own cost and those of adjacent agents. Prior to making his decision, each agent observes only the cost structure associated with nodes that can be reached by traversing no more than r arcs. Decisions are selected without any coordination, with the common objective of minimizing average cost among agents. We consider such decisions decentralized since agents act based on different information. Cost incurred by an optimal centralized strategy, in which a single decision-maker has access to all information and dictates all decisions, is employed as a performance benchmark. We show that, to maintain a certain level of performance relative to optimal centralized strategies, decentralized deterministic strategies require r to be proportional to the number of agents. This means that the amount of information accessible to any agent should be proportional to the total number of agents. Stochastic strategies, on the other hand, decentralize more gracefully—the amount of information required by each agent is independent of the total number of agents.     

Efficiency properties of binary ecolabeling

We investigate efficiency properties of binary ecolabels in a homogeneous good market with heterogeneous consumers. Faced with the minimum technology standard, firms make endogenous entry, certification, and price/quantity decisions. We consider both perfect and imperfect competition with or without sunk fixed costs. Our findings are as follows. Ecolabeling alone does not achieve the first-best outcome and, to achieve the second best, may need to set the standard less strict than the efficient level. Without sunk fixed costs, ecolabeling can achieve the first-best outcome provided that both the technology standard and the complementary pollution tax are set at efficient levels. With sunk fixed costs, however, differential excise taxes that would restore allocative efficiency induce more entry than optimal, and thus, can be even welfare decreasing relative to no tax outcome. Tightening the technology standard may ameliorate such an adverse effect of the corrective tax system by reducing excessive entry and pollution per output by the certified firms.     

Moral Hazard and Other-Regarding Preferences

The paper aims at obtaining new theoretical insights by combining the standard moral hazard models of principal–agent relationships with theories of other-regarding preferences, in particular inequity aversion theory. The principal is in general worse off, as the agent cares more about the wellbeing of the principal. When there are multiple symmetric agents who care about each other's wellbeing, the principal can optimally exploit their other-regarding nature by designing an appropriate interdependent contract such as a "fair" team contract or a relative performance contract. The approach taken in this paper can shed light on issues on endogenous preferences within organizations.     

Efficient and stable collective choices under gregarious preferences

We consider collective choice problems where a set of agents have to choose an alternative from a finite set and agents may or may not become users of the chosen alternative. An allocation is a pair given by the chosen alternative and the set of its users. Agents have gregarious preferences over allocations: given an allocation, they prefer that the set of users becomes larger. We require that the final allocation be efficient and stable (no agent can be forced to be a user and no agent who wants to be a user can be excluded). We propose a two-stage sequential mechanism whose unique subgame perfect equilibrium outcome is an efficient and stable allocation which also satisfies a maximal participation property.     

Efficient and stable collective choices under gregarious preferences

We consider collective choice problems where a set of agents have to choose an alternative from a finite set and agents may or may not become users of the chosen alternative. An allocation is a pair given by the chosen alternative and the set of its users. Agents have gregarious preferences over allocations: given an allocation, they prefer that the set of users becomes larger. We require that the final allocation be efficient and stable (no agent can be forced to be a user and no agent who wants to be a user can be excluded). We propose a two-stage sequential mechanism whose unique subgame perfect equilibrium outcome is an efficient and stable allocation which also satisfies a maximal participation property.     

Conformism,peer pressure and adverse selection

To examine the effects of peer pressure in adverse selection problem, we define a peer pressure function that represents the psychological costs and incorporate it into the agent's utility function. Based on these assumptions, the efficient agent who has conformity preference produces less outputs than the first-best level, while the inefficient agent produces more than the second-best level of standard adverse selection output when the agents feel peer pressure among themselves. Although the production gap between the utility functions under peer pressure narrows, the gap of the ex post information rent goes wider as the information rent of efficient agents increases. Our theoretical results are consistent with some empirical/experimental findings.