Consumers and Agency Problems

Canice Prendergast
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Canice Prendergast: University of Chicago and NBER

Economic Journal, 2002, vol. 112, issue 478, C34-C51

Abstract: Consumers solve many agency problems, by pointing out when they believe that agents have made mistakes. I consider the role that consumers play in inducing efficient behaviour by agents. I distinguish cases where consumers have similar preferences to the principal, from those where they diverge. In the former case, allowing consumer feedback improves allocations, and increasing consumer information is unambiguously beneficial. Where consumers disagree with principals over desired outcomes, which characterises many public sector benefits, consumers" feedback about the performance of agents can reduce welfare. This may result in efficiently restricting the ability of consumers to complain about agent performance. Copyright Royal Economic Society 2002.

Date: 2002
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