Production Externalities and Two-Way Distortion in Principal-Multi-Agent Problems
AbstractThis paper studies an otherwise standard principal-agent problem with hidden information, but whether there are positive production externalities between agents: the output of any agent depends positively on the effort expended by the other agents. It is shown that the optimal contract for the principal exhibits two-way distortion: the effort of any agent is oversupplied (relative to the first-best) when his marginal cost effort is low, and undersupplied his marginal cost of effort is high. This pattern of distortion cannot otherwise arise in optimal single- or multi-agent incentive contracts, unless there are countervailing incentives. However, unlike the countervailing incentives case, the pattern of distortion is robust to the precise form of the externality.
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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 527.
Length: 27 pages
Date of creation: 1999
Date of revision:
INFORMATION ; EXTERNALITIES;
Other versions of this item:
- Lockwood, Ben, 2000. "Production Externalities and Two-way Distortion in Principal-multi-agent Problems," Journal of Economic Theory, Elsevier, vol. 92(1), pages 142-166, May.
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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