Common Shocks and Relative Compensation Schemes

Michael Magill and Martine Quinzii ()

No 05.21, IEPR Working Papers from Institute of Economic Policy Research (IEPR)

Abstract: This paper studies qualitative properties of an optimal contract in a multi-agent setting in which agents are subject to a common shock. We derive a necessary and sufficient condition for the optimal reward of an agent producing an output level y to be a decreasing (increasing) function of the outputs of the other agents, under the assumption that the agents’ outputs are informative signals of the value of the common shock. The condition is that the likelihood ratio p(y, e, )/p(y, e', ), where e is a higher effort level than e', and  is the value of the common shock, be a decreasing (increasing) function of . We derive conditions on the way the common shock affects the marginal product of effort under which the likelihood ratio is decreasing for all output levels, or increasing for some output levels and decreasing for others.

Date: Written
View list of references View citations in EconPapers

Downloads: (external link)
http://www.usc.edu/dept/LAS/economics/IEPR/Working ... agill,Quinzii%5D.pdf First version, 2004 (application/pdf)

Related works:
Working Paper: Common Shocks and Relative Compensation Schemes (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:scp:wpaper:05-21

Access Statistics for this paper

More papers in IEPR Working Papers from Institute of Economic Policy Research (IEPR)
Contact information at EDIRC.
Series data maintained by Farideh Motamedi ().