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Common Agency with Moral Hazard and Asymmetrically Informed Principals

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  • Norbert Maier

    (London Business School. Economics Department)

Abstract

In this paper, we analyze the equilibrium incentive schemes offered to an agent by two principals who can only observe correlated noisy signals of the one-dimensional action taken by the agent. We look at both cases when the two principals can or cannot cooperate in setting the terms of their incentive schemes. We show that minimizing the risk imposed on the agent may result in negative incentives being attached to the signal with the higher variation. We also find that under some conditions, the equilibrium e¤ort level is a non- monotonic function of the correlation coec cient of the two signals. When com- paring the power of the incentive schemes o¤ered by the two principals, we show that the principal with the higher valuation of the agent's e¤ort or the one observing a signal with smaller variance o¤ers more powerful incentives to the agent. Finally, we give an example of overprovision of e¤ort in the equilibrium with non-cooperating principals compared to the case of cooperating principals. This comes at the price of higher risk and welfare in former case is lower.

Suggested Citation

  • Norbert Maier, 2006. "Common Agency with Moral Hazard and Asymmetrically Informed Principals," CERS-IE WORKING PAPERS 0612, Institute of Economics, Centre for Economic and Regional Studies, revised 30 Aug 2006.
    • Handle: RePEc:has:discpr:0612
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    File URL: http://econ.core.hu/doc/dp/dp/mtdp0612.pdf
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    Cited by:

    1. Fehmina Malik & Manjesh K. ~Hanawal & Yezekael Hayel & Jayakrishnan Nair, 2019. "Revenue Sharing in the Internet: A Moral Hazard Approach and a Net-neutrality Perspective," Papers 1908.09580, arXiv.org.

    More about this item

    Keywords

    Common Agency; Moral Hazard;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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