Incentives and Discrimination
AbstractOptimal incentive mechanisms may require that agents are rewarded differentially even when they are completely identical and are induced to act the same. We demonstrate this point by means of a simple incentive model where agentsâ decisions about effort exertion is mapped into a probability that the project will succeed. We give necessary and sufficient conditions for optimal incentive mechanisms to be discriminatory. We also show that full discrimination across all agents is required if and only if the technology has increasing return to scale. In the non-symmetric framework we show that negligible differences in agentsâ attributes may result in major differences in rewards in the unique optimal mechanism.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 94 (2004)
Issue (Month): 3 (June)
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- Aghion, Philippe & Tirole, Jean, 1997.
"Formal and Real Authority in Organizations,"
4554125, Harvard University Department of Economics.
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- Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
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