Implementation of multi-agent incentive contracts with the principal's renegotiation offer

The purpose of this paper is to explore a mechanism for supporting desired equilibrium actions in a one-principal, multi-agent model when the principal makes a renegotiation offer. We show that there exists a mechanism in which the principal's most preferred mixed strategy is always supported. Received: 30 May 1997 / Accepted: 10 October 1998     

On the generalized principal-agent problem: Decomposition and existence results

This paper addresses the class of generalized agency problems: situations in which adverse selection and moral hazard are jointly present. We present a decomposition of the principal's optimization problem under the first-order approach that sheds light on the interactions between the two types of private information, and also significantly improves tractability. We use the decomposition to (1) provide examples of closed form solutions of the optimal contract, and (2) analyze the existence of optimal contracts. We also show that the first-order approach is valid in generalized agency problems if the production technology satisfies the linear distribution function condition (LDFC) in actions and types. For more general production technologies the Mirrlees-Rogerson sufficient conditions need to be extended to include restrictions on the form of the optimal contract. Received: 11 August 1997 / 26 September 1999     

Multiproject team assignments

We consider expected profit maximizing mechanisms for a principal who has to allocate a group of agents among a number of projects, assuming that the principal has incomplete information about each agent's ability type, and the agents follow the Bayes-Nash or the dominant strategy equilibrium behavior. We find that while expected profit maximizing mechanisms are similar to the optimal auction (Myerson, 1981), the incentive compatibility constraints are much more restrictive. Interestingly, these constraints are satisfied if each agent's characteristics change in a consistent manner not only with types, but also from project to project. Received: 30 April 1997 / Accepted: 22 December 1998     

Sprumont's characterization of the uniform rule when all single-peaked preferences are admissible

Sprumont (1991) has established that the only allocation rule for the division problem that is strategy-proof, efficient, and anonymous is the uniform rule when the domain is the set of all possible profiles of continuous single-peaked preferences. Sprumont's characterization of the uniform rule is shown to hold on any larger domain of single-peaked preferences. Received: 15 December 1998 / Accepted: 12 April 1999     

Competition among mechanism designers in a common value environment

A competitive economy is studied in which sellers offer alternative direct mechanisms to buyers who have private information about their own private use value for the commodity being traded. In addition the commodity has a common value to all buyers, perhaps represented by the future resale value of the commodity. A competitive equilibrium in mechanisms is described. In every such equilibrium it is shown that sellers must offer mechanisms that are allocationally equivalent to English ascending price auctions. The reservation prices that sellers set are shown to be below their ex post cost of trading the commodity. Received: 24 April 1998 / Accepted: 8 March 1999     

Hierarchies and information-processing organizations

This paper analyzes organizational structures that minimize information processing costs for a specific organizational task. Organizations consist of agents of limited ability connected in a network. These agents collect and process information, and make decisions. Organizations implement strategies – mappings from environmental circumstances to decisions. The strategies are exogenously given from a class of “pie” problems to be defined in this paper. The notion of efficiency is lexicographic: the primary criterion is minimizing the number of agents, and the secondary criterion is minimizing the number of connections between the agents. In this modeling framework, efficient organizations are not hierarchical for a large number of problems. Hierarchies often fail to exploit fully the information processing capabilities of the agents because in a hierarchy, subordinates have a single superior. Received: 1 December 1995 / Accepted: 11 October 1998     

Full pooling in multi-period contracting with adverse selection and noncommitment

This paper analyses multi-period regulation or procurement policies under asymmetric information between the regulator and regulated firms. As well known in the literature, some degree of separation is always optimal under any form of commitment. In contrast, we show that full pooling is optimal under noncommitment when the discount factor is sufficiently high. We also discuss the meaning of full pooling under double randomization. Finally, we provide a graphical analysis of the second-best policy in terms of the regulator's commitment capacity. Received: 4 December 1996 / 7 October 1999     

Multiprincipals multiagents incentive design

This paper studies a simple setting in which the contractual arrangements which determine the incentives for agents are not designed by a single central planner, but are themselves the outcome of a game among multiple noncooperatively acting principals. The notion of an Epsilon Contracting Equilibrium is introduced to predict the outcome of the contract-design game among principals. Symmetric pure strategy Epsilon Contracting Equlibria may not exist in perfectly symmetric environments. In a symmetric Epsilon Contracting Equilibrium in mixed strategies coordination failure may lead to a suboptimal institutional network in which the agents “cheat” their principals. Received: 14 June 1995 / Accepted: 09 August 1999     

Regulation in a political economy: explaining limited commitment and the ratchet effect

Abstract. This paper shows that in a political economy with repeated elections governments that possess full commitment behave as if their commitment is limited. Two different endogenous versions of the ratchet effect obtain: If contracts of previous governments tie newly elected governments, governments are unable to resist renegotiation. If previous contracts do not bind new governments and taxation has a crowding–out effect, a ratchet effect occurs that is similar, but not identical to the standard ratchet effect that is due to intertemporal non–commitment. Social welfare may be higher in the latter case, when the governing party is allowed to use bonds. Received: March 14, 2000     

A characterization of the existenceof optimal dominant strategy mechanisms

This paper provides two theorems which characterize the domains of valuation functions for which there exist Pareto efficient and truth dominant strategy mechanisms (balanced Groves mechanisms). Theorem 1 characterizes the existence of balanced Groves mechanisms for a general class of valuation functions. Theorem 2 provides new balance-permitting domains of valuation functions by reducing the problem of solving partial differential equations to the problem of solving a polynomial function. It shows that a balanced Groves mechanism exists if and only if each valuation function in the family under consideration can be obtained by solving a polynomial function with order less than , where n is the number of individuals. Received: 5 January 1997 / Accepted: 25 May 1999     

Project evaluation and organizational form

In situations of imperfect testing and communication, as suggested by Sah and Stiglitz (AER, 1986), organizational forms can be identified with different rules of aggregating evaluations of individual screening units. In this paper, we discuss the relative merits of polyarchical organizations versus hierarchical organizations in evaluating cost-reducing R&D projects when individual units' decision thresholds are fully endogenous. Contrary to the results of Sah and Stiglitz, we find that the relative merit of an organizational form depends on the curvature of the screening functions of the individual evaluation units. We find that for certain parameters organizations would want to implement asymmetric decision rules across screening units. This allows us to derive sufficient conditions for a polyarchy to dominate a hierarchy. We also find conditions for which the cost curves associated with the two organizational forms cross each other. In this case the optimal organizational form will depend on product market conditions and on the “lumpiness” of cost-reducing R&D.     

Lattice structure of knowledge and agreeing to disagree

This paper is a contribution to the study of the underlying mathematical structure of common-knowledge, which gives the well-known result of Aumann about the impossibility of ‘agreeing to disagree’. We present the Bayesian subjective probability model with player's belief: i.e. a triple (? %plane1D;4AF;, μ), in which i is a player. ? is a lattice in the field of sets of a state space Ω, %plane1D;4AF;, is a correspondence assigning to each state ω a filter %plane1D;4AF;(ω) in ?, and μ is a common-prior. For this model, we impose none of the important restrictions on the information structure in the Aumann-Bacharach model: axiom of knowledge K₁. axiom of transparency K₂ and axiom of wisdom K₃. We can extend both the disagreement theorem of Aumann and the agreement theorem of Geanacoplos and Polemarchakis under the assumption that each ? is an Artinian lattice.     

The not-so-secret-agent: Professional monitors,hierarchies and implementation

Abstract. It is well-known that, when agents in an organization possess private information that is unverifiable by an outside party, games where agents simply announce their information can have multiple equilibria that may impede the successful implementation of the organization's objectives. We show that the introduction of a professional monitor (e.g. auditor, regulator, supervisor) can help to destroy the “bad' equilibria when agents have private information but have incomplete info rmation about others' information. Received: 21 May 1998 / Accepted: 26 May 2000     

On efficient trading mechanisms between one seller and n buyers

Myerson and Satterthwaite (1983) prove that if one seller and one buyer have independent private valuations for an indivisible object then no individually rational and incentive compatible trading mechanism can guarantee ex post efficiency when gains from trade are uncertain. Makowski and Mezzetti (1993) show that this is not the case when there are at least two buyers. In the latter context, if the highest possible seller's valuation is not too large, we provide an ex post efficient mechanism in which the mechanism designer and the agents are not required to know the probability distribution for the seller's valuation. Received: February 18, 1998 / Accepted: September 10, 1999     

The scheduling and organization of periodic associative computation: Essential networks

This paper defines and characterizes essential decentralized networks for calculating the associative aggregate of one or more cohorts of data. A network is essential if it is not possible to eliminate an instruction or manager and still calulate the aggregate of each cohort. We show that for essential networks, the graphs that depict the operations and data dependencies are trees or forests. These results assist in the characterization of efficient networks. Received: 15 October 1994 / Accepted: 6 March 1997     

The scheduling and organization of periodic associative computation: Efficient networks

This paper characterizes the efficient decentralized networks for calculating the associative aggregate of cohorts of data of a fixed size that arrive periodically. Radner (1993) proposed this problem of periodic parallel associative computation as a model of the ongoing information processing and communication by the administrative staff of a large organization. For a simpler model in which the organization processes a single cohort of data – which is equivalent to the periodic model when the agents are paid only when busy – he found that the efficient networks are hierarchical but quite irregular, even though the computation problem and technology are each symmetric. In the periodic model in which managers are paid even when idle, it becomes important to minimize idle time when scheduling managers to processing tasks. Such scheduling appears more difficult when each problem is processed by an irregular hierarchy, which suggest that hierarchies might be more regular in the periodic model. However, we show that in a class of efficient networks for periodic computation that spans the efficiency frontier, the processing of each cohort is similar to the efficient processing of a single cohort, and the overall organizational structure is not even hierarchical. Received: 15 October 1994 / Accepted: 6 March 1997     

Managerial costs for one-shot decentralized information processing

Radner (1993) proposed a model of decentralized associative computation as a means to understand information processing in organizations. In the model, in which an organization processes a single cohort of data, resources are measured by the number of managers. This paper (i) explains why resources should instead be measured by the time the managers are busy, (ii) shows that, nevertheless, the characterization of sufficient conditions for efficient networks in Radner (1993) and Keren and Levhari (1979) is valid for either measure, (iii) shows that measuring resources by the number of operations leads to sharper results on necessary conditions for efficiency, (iv) strengthens Radner's results on the irregularity of efficient hierarchies, and (v) compares the relative costs of parallelization under the two measures. Received: 28 February 1997 / Accepted: 30 September 1997