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Too Few Cooks Spoil The Broth

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  • Marisa Ratto
  • Wendelin Schnedler

Abstract

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.
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Suggested Citation

  • Marisa Ratto & Wendelin Schnedler, 2004. "Too Few Cooks Spoil The Broth," Royal Economic Society Annual Conference 2004 154, Royal Economic Society.
    • Handle: RePEc:ecj:ac2004:154
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    References listed on IDEAS

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    1. Olsen, Trond E & Torsvik, Gaute, 1998. "Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 413-438, May.
    2. Roland Strausz, 1997. "Delegation of Monitoring in a Principal-Agent Relationship," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(3), pages 337-357.
    3. George Baker, 2002. "Distortion and Risk in Optimal Incentive Contracts," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 728-751.
    4. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-656, May.
    5. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, vol. 91(2), pages 200-205, May.
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    Cited by:

    1. Grout, Paul & Schnedler, Wendelin, 2008. "Non-Profit Organizations in a Bureaucratic Environment," IZA Discussion Papers 3685, Institute of Labor Economics (IZA).
    2. Jenny Kragl & Anja Schöttner, 2014. "Wage Floors, Imperfect Performance Measures, And Optimal Job Design," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 525-550, May.
    3. Felipe Balmaceda, 2012. "On the Optimality of One-size-fits-all Contracts: The Limited Liability Case," Documentos de Trabajo 291, Centro de Economía Aplicada, Universidad de Chile.
    4. Christian Espinosa & Juan Gorigoitía & Carlos Maquieira, 2012. "Nonlinear behaviour of EMBI index:the case of eastern European countries," Working Papers 37, Facultad de Economía y Empresa, Universidad Diego Portales.
    5. Chen, Bo, 2012. "All-or-nothing payments," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 133-142.
    6. Kragl, Jenny & Schöttner, Anja, 2011. "Wage floors and optimal job design," Bonn Econ Discussion Papers 01/2011, University of Bonn, Bonn Graduate School of Economics (BGSE).
    7. Ratto Marisa & Schnedler Wendelin, 2008. "Too Few Cooks Spoil the Broth: Division of Labor and Directed Production," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-19, August.
    8. repec:awi:wpaper:0474 is not listed on IDEAS

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    More about this item

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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