Task-specific effort costs and the trade-off between risk and efficiency

This paper considers a principal-agent model in which an agent chooses the level of effort on two tasks that determine two separate outputs. The level of effort is private information to the agent. We examine the relationship between risk and incentives when the agent has a preference towards one of the two tasks. This is modelled by the assumption that the cost of effort is task specific. We show that when outputs are not perfectly measurable, even if the measurement errors have the same variance, the principal has to set different marginal incentives. This is because the agent tries to spread the risk, created by imperfect output measurement, by distributing more evenly his effort between the two tasks, thereby moving away from an efficient allocation of effort. If the two outputs are measured with different precision, it can be optimal for the principal to set higher marginal incentives on the output measured with less precision. Hence the standard result of the negative correlation between risk and incentives does not necessarily hold.uncertainty, risk spreading, efficiency, incentives

Optimal Audit Policy and Heterogenous Agents

Frauds can be explained not only in terms of individual willingness to cheat, but may also be driven by opportunities to behave dishonestly. The audit policy should therefore be different for different categories of agents. This paper focuses on the optimal audit policy when there are two categories of agents and shows that the auditor adopts different policies depending on its budget. When resources are quite limited, the auditor sets identical audit probabilities for both types. On the other hand, in most of the cases, the authority should first ensure that people with lower opportunities choose not to commit an offence.Fraud, audit, opportunities, budget allocation.

Too Few Cooks Spoil the Broth: Division of Labour and Directed Production

How can a manager influence workers' activity while knowing little about it? This paper examines a situation where production requires several tasks, and the manager wants to direct production to achieve a preferred allocation of effort across tasks. However, the effort that is required for each task cannot be observed, and the production result is the only indicator of worker activity. This paper illustrates that in this situation, the manager cannot implement the preferred allocation with a single worker. On the other hand, the manager is able to implement the preferred allocation by inducing a game among several workers. Gains to workers from collusion may be eliminated by an ability-dependent, but potentially inefficient, task assignment. These findings provide a new explanation for the division of labor, and bureaucratic features such as "over"-specialization and "wrong" task allocation.specialization, job design, moral hazard, multitasking

Division of Labour and Directed Production

We examine a situation where efforts on different tasks positively affect production but are not separately verifiable and where the manager (principal) and the worker (agent) have different ideas about how production should be carried out: agents prefer a less efficient way of production. We show that by dividing labour (assigning tasks to different agents and verifying that agents do not carry out tasks to which they are not assigned), it is possible for the principal to implement the efficient way of production. Colluding agents can undermine this implementation. However, if agents have different abilities, collusion can be prevented by a specific assignment of agents to tasks.hidden action, moral hazard, specialisation, job design

Too few cooks spoil the broth

We consider a principal-agent relationship in which two tasks need to be carried out. Each task involves a decision. The principal can neither contract on the two decisions nor on the benefit which she receives from them but only on a signal, which simultaneously reflects both. We show that the efficient choice cannot be achieved if the principal employs a single agent. If, however, the principal employs a second agent, she can set a payment scheme such that the efficient choice can be implemented. We also examine when this implementation is vulnerable to collusion.hidden action, moral hazard, optimal contract, job design, asymmetric information

Division of Labour and Directed Production

We examine a situation where efforts on different tasks positively affect production but are not separately verifiable and where the manager (principal) and the worker (agent) have different ideas about how production should be carried out: agents prefer a less efficient way of production. We show that by dividing labour (assigning tasks to different agents and verifying that agents do not carry out tasks to which they are not assigned), it is possible for the principal to implement the efficient way of production. Colluding agents can undermine this implementation. However, if agents have different abilities, collusion can be prevented by a specific assignment of agents tasks.hidden action, moral hazard, specialisation, job design

Optimal Audit Policy and Heterogenous Agents

Frauds can be explained not only in terms of individual willingness to cheat, but may also be driven by opportunities to behave dishonestly. The audit policy should therefore be different for different categories of agents. This paper focuses on the optimal audit policy when there are two categories of agents and shows that the auditor adopts different policies depending on its budget. When resources are quite limited, the auditor sets identical audit probabilities for both types. On the other hand, in most of the cases, the authority should first ensure that people with lower opportunities choose not to commit an offence.fraud, audit, opportunities, budget allocation

Relative performance of two simple incentive mechanisms in a public good experiment

This paper reports on experiments designed to compare the performance of two incentive mechanisms in public goods problems. One mechanism rewards and penalizes deviations from the average contribution of the other agents to the public good (tax-subsidy mechanism). Another mechanism allows agents to subsidize the other agents’contributions (compensation mechanism). It is found that both mechanisms lead to an increase in the level of contribution to the public good. The tax-subsidy mechanism allows for good point and interval prediction of the average level of contribution. The compensation mechanism allows for less reliable prediction of the average level of contributions.public goods, voluntary provision, incentive mechanisms

Relative performance of two simple incentive mechanisms in a public goods experiment.

We compare the performance of two incentive mechanisms in public goods experiments. One mechanism, the Falkinger mechanism, rewards and penalizes agents for deviations from the average contributions to the public good (Falkinger mechanism). The other, the compensation mechanism, allows agents to subsidize the other agents' contributions (compensation mechanism). It is found that both mechanisms lead to an increase in the level of contributions to the public goods. However, the Falkinger mechanism predicts the average level of contributions more reliably than the compensation mechanism.incentive mechanisms; voluntary provision; public goods;