Location of Repository

Production externalities and two-way distortion in principal-multi-agent problems

By Ben Lockwood

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

Topics: HB
Publisher: University of Warwick, Department of Economics
Year: 1999
OAI identifier: oai:wrap.warwick.ac.uk:1651

Suggested articles

Preview


To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.