Gaming and Strategic Opacity in Incentive Provision

Margaret Meyer, Florian Ederer and Richard Holden

No 640, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Abstract It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments in a two-task moral hazard model in which the agent is privately informed about which task is less costly for him. We examine a simple class of incentive schemes that are "opaque" in that they make the agent uncertain ex ante about the incentive coefficients in the linear payment rule. Relative to transparent menus of linear contracts, these opaque schemes induce more balanced efforts, but they also impose more risk on the agent per unit of aggregate effort induced. We identify specific settings in which optimally designed opaque schemes not only strictly dominate the best transparent menu but also eliminate the efficiency losses from the agent's hidden information. Opaque schemes are more likely to be preferred to transparent ones when (i) the agent's privately known preference between the tasks is weak; (ii) the agent's risk aversion is significant; (iii) efforts on the tasks are highly complementary for the principal; or (iv) the errors in measuring performance have large correlation or small variance. Revised April 2018

Keywords: Contracts; incentives; gaming; opacity; randomization (search for similar items in EconPapers)
JEL-codes: D21 D86 L22 (search for similar items in EconPapers)
Date: 2013-01-17
New Economics Papers: this item is included in nep-bec, nep-cta, nep-hrm, nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Gaming and strategic opacity in incentive provision (2018)
Working Paper: Gaming and Strategic Opacity in Incentive Provision (2014)
Working Paper: Gaming and Strategic Opacity in Incentive Provision (2014)
Working Paper: Gaming and Strategic Opacity in Incentive Provision (2013)
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