Production Externalities and Two-Way Distortion in Principal-Multi-Agent Problems

Ben Lockwood

No 269249, Economic Research Papers from University of Warwick - Department of Economics

Abstract: This paper studies an otherwise standard principal-agent problem with hidden information, but whether there are positive production externalities between agents: the output of any agent depends positively on the e¤ort expended by other agents. It is shown that the optimal contract for the principal exhibits two-way distortion: the e¤ort of any agent is oversupplied (relative to the …rst-best) when his marginal cost of e¤ort is low, and undersupplied his marginal cost of e¤ort is high. This pattern of distortion cannot otherwise arise in optimal single- or multi-agent incentive contracts, unless there are countervailing incentives. However, unlike the countervailing incentives case, the pattern of distortion is robust to the precise form of the externality.

Keywords: Agricultural and Food Policy; Production Economics (search for similar items in EconPapers)
Pages: 30
Date: 1999-04-04
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Journal Article: Production Externalities and Two-way Distortion in Principal-multi-agent Problems (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:269249

DOI: 10.22004/ag.econ.269249

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