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

Ben Lockwood

The Warwick Economics Research Paper Series (TWERPS) 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 effort expended by the other agents. It is shown that the optimal contract for the principal exhibits two-way distortion: the effort of any agent is oversupplied (relative to the first-best) when his marginal cost effort is low, and undersupplied his marginal cost of effort 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: INFORMATION; EXTERNALITIES (search for similar items in EconPapers)
JEL-codes: D62 D82 (search for similar items in EconPapers)
Pages: 27 pages
Date: 1999
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https://warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twoway1.pdf

Related works:
Journal Article: Production Externalities and Two-way Distortion in Principal-multi-agent Problems (2000)
Working Paper: Production Externalities and Two-Way Distortion in Principal-Multi-Agent Problems (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:527

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