Principal-Agents Contracts Under the Threat of Insurance
AbstractThe traditional principal-agent model assumes that the principal offers an exclusive contract to the agent. This paper shows that the standard results are not robust to the introduction of additional contracting opportunities for the agent. We analyze equilibria of an extended game with the presence of additional players who might trade risk away from the agent. The contract offered by the principal in order to elicit high effort is steeper than in the standard model. In some settings, the agent accepts this contract and then unwinds part of those incentives through additional trades. (This seems consistent with some findings in the literature on managerial compensation). For some settings and parameter values, suboptimal effort is implemented in equilibrium, the principal is worse off, and total welfare is lower. These findings may call for a revision of some previous theoretical and applied conclusions. In designing compensation schemes, attention should be paid to outside opportunities, even when they are productively unrelated. Some results such as “the Informativeness Principle” might need to be reformulated to consider the observability of signals by the principal relative to their observability by other potential traders.
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Bibliographic InfoPaper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 69.
Length: 52 pages
Date of creation: Apr 2004
Date of revision: Apr 2004
Principal-Agent; Moral Hazard; Insurance; Common agency; Non-exclusive contracts; Managerial compensation.;
Other versions of this item:
- Mariano Tommasi & Federico Weinschelbaum, 2007. "Principal-Agent Contracts under the Threat of Insurance," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(3), pages 379-393, September.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
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