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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- Philippe Aghion & Jean Tirole, 1994.
"Normal and Real Authority in Organizations,"
94-13, Massachusetts Institute of Technology (MIT), Department of Economics.
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- Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
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