Incentive Contracts in Two-sided Moral Hazards with Multiple Agents PDF Download
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Author: Nabil I. Al-Najjar
Publisher:
ISBN:
Category : Business ethics
Languages : en
Pages : 23
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Book Description
Author: Nabil I. Al-Najjar
Publisher:
ISBN:
Category : Business ethics
Languages : en
Pages : 23
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Author: Florian Englmaier
Publisher:
ISBN:
Category :
Languages : en
Pages : 50
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Author: Bernard Sinclair-Desgagne
Publisher:
ISBN:
Category :
Languages : en
Pages : 30
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This paper seeks to characterize incentive compensation in a static principal-agent moral hazard setting in which both the principal and the agent are prudent (or downside risk averse). We show that optimal incentive pay should then be `approximately concave' in performance, the approximation being closer the more downside risk averse the principal is compared to the agent. Limiting the agent's liability would improve the approximation, but taxing the principal would make it coarser. The notion of an approximately concave function we introduce here to describe optimal contracts is relatively recent in mathematics; it is intuitive and translates into concrete empirical implications, notably for the composition of incentive pay packages. We also clarify which measure of prudence - among the various ones proposed in the literature - is relevant to investigate the tradeoff between downside risk sharing and incentives.
Author: Borys Grochulski
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ISBN:
Category :
Languages : en
Pages : 0
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We study the implications of job destruction risk for optimal incentives in a long-term contract with moral hazard. We extend the dynamic principal-agent model of Sannikov (2008) by adding an exogenous Poisson shock that makes the match between the firm and the agent permanently unproductive. In modeling job destruction as an exogenous Poisson shock, we follow the Diamond-Mortensen-Pissarides search-and-matching literature. The optimal contract shows how job destruction risk is shared between the rm and the agent. Arrival of the job-destruction shock is always bad news for the rm but can be good news for the agent. In particular, under weak conditions, the optimal contract has exactly two regions. If the agent's continuation value is below a threshold, the agent's continuation value experiences a negative jump upon arrival of the job-destruction shock. If the agent's value is above this threshold, however, the jump in the agent's continuation value is positive, i.e., the agent gets rewarded when the match becomes unproductive. This pattern of adjustment of the agent's value at job destruction allows the firm to reduce the costs of effort incentives while the match is productive. In particular, it allows the firm to adjust the drift of the agent's continuation value process so as to decrease the risk of reaching either of the two inefficient agent retirement points. Further, we study the sensitivity of the optimal contract to the arrival rate of job destruction.
Author: Son-Ku Kim
Publisher:
ISBN:
Category :
Languages : en
Pages :
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This paper studies the characteristics of optimal contracts when the agent is risk-averse in the double moral-hazard situation in which the principal also participates in the production process. It is already known that a simple linear contract is one of many optimal contracts under the double moral-hazard when the agent is risk-neutral. We find that the agent's optimal incentive scheme in this case is unique and non-linear, but less sensitive to output than would be designed under a single moral-hazard. We also find that the linear contract is not robust in the sense that the above unique and non-linear contract does not approach the linear contract as the agent's risk-aversion approaches zero.
Author: Marcus Dittrich
Publisher:
ISBN:
Category :
Languages : en
Pages : 20
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Author: Hideshi Itō
Publisher:
ISBN:
Category : Incentives in industry
Languages : en
Pages : 50
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Book Description
This paper concerns moral hazard problems in multi-agent situations where cooperation is an issue. Each agent chooses his own effort, which improves stochastically the outcome of his own job. Agents also choose the amount of 'help' to extend to other agents, which improves the performance of other agents. By selecting appropriate compensation schemes, the principal can design the task structure of the firm: The principal may prefer an unambiguous division labor, where each agent is inclined not to help other agents and specializes in his own job. Or the principal may prefer teamwork where each agent is motivated to help other agents. The analysis identifies two important determinants in choosing the optimal task structure; the effect of 'interpersonal interaction' and the attitude of the agents in providing 'small' amounts of help.
Author: Priyodorshi Banerjee
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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We study contracting in a principal multi-agent moral hazard problem where agents receive private information on the realisation of a common productivity shock after contracts are signed, but before actions are taken. Joint performance evaluation schemes can be optimal when private information is of sufficiently high quality, while relative performance evaluation schemes are optimal with poor quality private signals. Interdependent incentive schemes create an endogenous externality between agents, the nature of which depends on the structure of the evaluation scheme. Joint performance evaluation schemes generate endogenous complementarities in the presence of correlated private information, and so may be optimal.
Author: Benoit Julien
Publisher:
ISBN:
Category :
Languages : en
Pages : 40
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Book Description
Principals seek to trade with agents by posting incentive contracts in a search environment. A contract solves the ex ante search problem, and adverse selection and moral hazard ex post. We fully characterise the equilibrium for quasi linear preferences, and derive some comparative statics. If using appropriate transfers the equilibrium allocation is constrained welfare optimal, in contrast to the one-to-one principal-agent problem. Search frictions thus correct that inefficiency because searching requires internalizing the utility of agents. Incentives are weaker than in bilateral contracting, and agents enjoy more efficient risk sharing. With a constraint on transfers search and moral hazard interact and may induce an inefficient allocation; principal competition results in over-insurance of the agents and too little effort in equilibrium.
Author: John Evans
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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To address agents' moral hazard over effort, incentive contracts impose risk on the agents. As performance measures become noisier, the conventional agency analysis predicts that principals will reduce the incentive weights assigned to such measures. However, prior empirical results (Prendergast 2002) frequently find the opposite, i.e., incentive weights are larger (agents bear more risk) in more uncertain environments. This paper provides new evidence on the association between the extent of uncertainty and the level of risk imposed on agents. In the context of contracts between managed care organizations and physicians, we examine the effect of task characteristics and the legal liability environment on the extent of risk that physicians bear. We derive the optimal weighting of multiple performance measures in a model of a physician's choice of revenue-generating and cost control efforts. The model predicts that physicians who face less task uncertainty bear more cost risk in their contracts, as predicted by the conventional moral hazard model. Likewise, the model predicts that as the association between task uncertainty and legal liability uncertainty becomes stronger, physicians bear less cost risk in their contracts. Our empirical results generally support these predictions. We offer an explanation for why these results tend to be consistent with the conventional moral hazard analysis, contrary to empirical results in a number of previous studies.
