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Common Agency with Moral Hazard and Asymmetrically Informed Principals

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  • Norbert Maier

    ()
    (London Business School. Economics Department)

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    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.

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    File URL: http://econ.core.hu/doc/dp/dp/mtdp0612.pdf
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    Bibliographic Info

    Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0612.

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    Date of creation: 30 Aug 2006
    Date of revision: 30 Aug 2006
    Handle: RePEc:has:discpr:0612

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    Keywords: Common Agency; Moral Hazard;

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