Ranking agencies under moral hazard |
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Authors: | Edward Henry Robbins Bharat Sarath |
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Affiliation: | (1) Financial Economics Analytics and Research, 9140 Santayana Drive, VA 22031 Fairfax, USA;(2) Stern School, New York University, 40 West Fourth Street, NY 10012 New York, USA |
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Abstract: | Summary. We provide rankings across uncertain outputs generated by agents functioning within the Principal-Agent paradigm. For agents who are identical except for their productivity, a necessary (but not sufficient) condition for an agent to be preferred is that her output dominates that of lower agents in the sense of First Degree Stochastic Dominance (FDSD) at every level of effort. Sufficient conditions are based on Blackwell s ranking of information systems and involves a characterization of FDSD using stochastic matrices. Our conditions for ranking outputs extends earlier results concerning the value of information within the agency framework. We also show how our techniques can be adapted to rank agents even if the first-order approach for determining optimal contracts fails to hold.Received: April 2, 1996; revised version: October 30, 1996This revised version was published online in February 2005 with corrections to the cover date. |
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Keywords: | JEL Classification Numbers: D81 D82. |
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