Extensions and applications of principal-agent problems

This thesis extends principal-agent models with hidden actions, and uses those models to gain insight into issues in education. Chapter 2 gives a comparative statics analysis of a conventional model with a single principal and agent. It describes the effect on contracts of changes in the outcome of the principal-agent relationship, stating the results in the form of Slutsky equations. Continuing with the same model, Chapter 3 allows the principal to choose an action and shows that this action can motivate the agent, and thus act as an incentive device. The model is extended further in Chapter 4, which allows agents to bargain with the principal over the outcome. In this form the model is an extension of a commodity exchange model with uncertain endowments. Using the core as a solution concept, contracts which survive bargaining among agents are derived. Chapters 5 and 6 consider moral hazard in education. In Chapter 5 the government gives loans to students, and structures loan repayments so that students' future income is to some extent insured. The government chooses the optimal level of insurance, given the possibility of shirking by students. In Chapter 6 the government hires educators, and chooses the optimal compensation of educators, given that they have an incentive to shirk. Both models extend principal-agent theory. In Chapter 5 students choose the length of education, so that the length of the principal-agent relationship is endogenous. This may affect the optimal insurance of students' future earnings. In Chapter 6 the number of educators and the skilled wage are endogenous. In terms of principal-agency, optimal contracts are derived in a general equilibrium model in which the number of agents hired by the principal, and their opportunity cost are endogenous