Combinatorial agency

Moshe Babaioff, Michal Feldman, Noam Nisan and Eyal Winter ()

Journal of Economic Theory, 2012, vol. 147, issue 3, 999-1034

Abstract: We study a combinatorial variant of the classical principal-agent model. In our setting a principal wishes to incentivize a team of strategic agents to exert costly effort on his behalf. Agentsʼ actions are hidden and the principal observes only the outcome of the team, which depends stochastically on the complex combinations of the efforts by the agents. The principal seeks the mechanism that maximizes the principalʼs net revenue given an equilibrium behavior of the agents. We investigate the structure of the optimal mechanism for various production technologies as the principalʼs value from the project varies. In doing so we quantify the gap between the first-best and second-best solutions. Our results highlight the qualitative and quantitative differences between production technologies that exhibit complementarities and substitutabilities between the agentsʼ actions. In comparing the first best with the second best we highlight the role of effort monitoring by the principal. As we shall see, the benefit from monitoring crucially depends on the underlying technology, with the two polar cases being perfect substitution and perfect complementarity.

Keywords: Agency theory; Incentives; Contracts; Hidden-action; Moral hazard (search for similar items in EconPapers)
JEL-codes: C72 D82 D86 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053112000117
Full text for ScienceDirect subscribers only

Related works:
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: https://EconPapers.repec.org/RePEc:eee:jetheo:v:147:y:2012:i:3:p:999-1034

DOI: 10.1016/j.jet.2012.01.010

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().