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Ex ante Randomization in Agency Models

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  • John C. Fellingham
  • Young K. Kwon
  • D. Paul Newman
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    Abstract

    We consider how a principal can use randomized strategies in designing optimal contracts in agency settings. We distinguish between ex post randomization (over fee schedules following act selection by the agent) and ex ante randomization (over fee schedules before act selection). We show that ex ante randomization may be efficient in both full information and private information settings under certain assumptions regarding preferences and the production technology. It is particularly significant that additive separability and concavity of the agent's utility function as well as concavity of the production function do not rule out efficient ex ante randomized contracts in private information settings, although, as is known, they rule out ex post randomization.

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    Bibliographic Info

    Article provided by The RAND Corporation in its journal RAND Journal of Economics.

    Volume (Year): 15 (1984)
    Issue (Month): 2 (Summer)
    Pages: 290-301

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    Handle: RePEc:rje:randje:v:15:y:1984:i:summer:p:290-301

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    Cited by:
    1. Timothy J. Kehoe & David K. Levine & Edward Prescott, 2000. "Lotteries, Sunspots and Incentive Constraints," Levine's Working Paper Archive 1974, David K. Levine.
    2. Brito, Dagobert L. & Hamilton, Jonathan H. & Slutsky, Steven M. & Stiglitz, Joseph E., 1991. "Dynamic optimal income taxation with government commitment," Journal of Public Economics, Elsevier, vol. 44(1), pages 15-35, February.
    3. Kilenthong, Weerachart T. & Townsend, Robert M., 2011. "Information-constrained optima with retrading: An externality and its market-based solution," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1042-1077, May.
    4. Lambert, Richard A., 2001. "Contracting theory and accounting," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 3-87, December.
    5. Dagobert L. Brito & Jonathan H. Hamilton & Steven M. Slutsky & Joseph E. Stiglitz, 1995. "Randomization in Optimal Income Tax Schedules," NBER Working Papers 3289, National Bureau of Economic Research, Inc.

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