On Inducing Agents with Term Limits to Take Appropriate Risk

Rohan Dutta and Pierre-Yves Yanni

Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ

Abstract: A principal needs agents to appropriately select a risky action over a safe one, with replacement as the only incentivizing tool. Agents wish solely to re- main in office and the risky action can reveal his decision-making competence. Aghion and Jackson (2017) show how the inability to commit to a retention pol- icy severely limits the principal’s welfare. We study this problem when agents face two-period term limits and find that this helps the principal considerably. The term limit structure allows the principal to mimic the ability to make commitments and enforce a random dismissal rule following the safe action. The incentive problem becomes even less severe if the agent has private information about his competence and the stakes are high.

Keywords: term-limits; elections; principal-agent; discretion; replacement (search for similar items in EconPapers)
JEL-codes: C72 D72 D82 D86 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2017
New Economics Papers: this item is included in nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montec:06-2017

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