Optimal Contracting with Subjective Evaluation: The Effects of Timing, Malfeasance and Guile

W. Bentley Macleod () and Teck Yong Tan

No 22156, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We introduce a general Principal-Agent model with subjective evaluation and malfeasance characterized by two-sided asymmetric information on performance that allows for an arbitrary information structure. Two generic contract forms are studied. An authority contract has the Principal reveal his information before the Agent responds with her information. Under such a contract, the Agent's compensation varies only with the Principal's information, while her information is used to punish untruthful behavior by the Principal. Conversely, a sales contract has the Agent reveal her information first. In this case, the Agent's performance incentives are affected by the information revealed by both parties. Because the Agent's information affects her compensation, the information revelation constraints are more complex under a sales contract, and provide a way to integrate Williamson's (1975) notion of guile into agency theory. We find that designing sales contracts for expert agents, such as physicians and financial advisors, are significantly more complex than designing optimal authority contracts.

JEL-codes: D86 J33 J41 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-lma and nep-mic
Note: LS TWP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as W. Bentley Macleod, 2003. "Optimal Contracting with Subjective Evaluation," American Economic Review, vol 93(1), pages 216-240.

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