Common Shocks and Relative Compensation Schemes
AbstractThis paper studies qualitative properties of an optimal contract in a multi-agent setting in which agents are subject to a common shock. We derive a necessary and sufficient condition for the optimal reward of an agent to be a decreasing (increasing) function of the outputs of the other agents, under the assumption that the agents' outputs are informative signals of the value of the common shock. The condition is that the likelihood ratio of a given outcome with high versus low effort be a decreasing (increasing) function of the common shock. We derive conditions on the way the common shock affects the marginal product of effort under which the likelihood ratio is decreasing for all output levels, or increasing for some output levels and decreasing for others.
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Bibliographic InfoPaper provided by University of California, Davis, Department of Economics in its series Working Papers with number 52.
Date of creation: 11 Apr 2005
Date of revision:
optimal incentive contracts; common shocks; multi agents; monotone likelihood ratio;
Other versions of this item:
- Magill, Michael & Quinzii, Martine, 2004. "Common Shocks and Relative Compensation Schemes," Working Papers 05-2, University of California at Davis, Department of Economics.
- Michael Magill & Martine Quinzii, 2004. "Common Shocks and Relative Compensation Schemes," IEPR Working Papers 05.21, Institute of Economic Policy Research (IEPR).
- D - Microeconomics
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