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Gaming and strategic opacity in incentive provision

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  • Florian Ederer
  • Richard Holden
  • Margaret Meyer

Abstract

We study the benefits and costs of “opacity” (deliberate lack of transparency) of incentive schemes as a strategy to combat gaming by better informed agents. In a two‐task moral hazard model in which only the agent knows which task is less costly, the agent has an incentive to focus his effort on the less costly task. Opaque schemes, which make a risk‐averse agent uncertain about which task will be more highly rewarded, mitigate such gaming but impose more risk. We identify environments in which opaque schemes not only dominate transparent ones, but also eliminate the costs of the agent's hidden information.

Suggested Citation

  • Florian Ederer & Richard Holden & Margaret Meyer, 2018. "Gaming and strategic opacity in incentive provision," RAND Journal of Economics, RAND Corporation, vol. 49(4), pages 819-854, December.
    • Handle: RePEc:bla:randje:v:49:y:2018:i:4:p:819-854
    DOI: 10.1111/1756-2171.12253
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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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