Incentive Structures Maximizing Residual Gain under Incomplete Information

Leonid Hurwicz and Leonard Shapiro

Bell Journal of Economics, 1978, vol. 9, issue 1, 180-191

Abstract: In a two-agent setting, one agent ("landlord") seeks to maximize his residual gain, i.e., that part of output remaining after payment of a reward to the other agent ("worker"). The reward must be a function of the worker's output since his effort cannot be directly observed, and the landlord must choose this function without knowing the worker's disutility and productivity parameters. A 50-50 split turns out to be the maximin (regret) solution in a broad class of cases, even if discontinuous reward functions are permitted. This "sharecropping" model suggests itself in problems where the first agent represents the government and the residual gain serves a paramount national or social objective.

Date: 1978
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