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Incentives for Boundedly Rational Agents

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  • Basov Suren

    (Melbourne University)

Abstract

This paper develops a theoretical framework for analyzing incentive schemes under bounded rationality. It starts from a standard principal-agent model and then superimposes an assumption of boundedly rational behavior on the part of the agent. Boundedly rational behavior is modeled as an explicit optimization procedure, which combines gradient dynamics with imitation and experimentation. The results predict the underprovision of optimal incentives and deviation from a standard sufficient statistics result from the agency literature. It also allows us to address the question of creating the optimal incentives in a multicultural environment.

Suggested Citation

  • Basov Suren, 2003. "Incentives for Boundedly Rational Agents," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-16, June.
    • Handle: RePEc:bpj:bejtec:v:topics.3:y:2003:i:1:n:2
    DOI: 10.2202/1534-598X.1093
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    References listed on IDEAS

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    1. Marianne Bertrand & Sendhil Mullainathan, 2000. "Do CEOs Set Their Own Pay? The Ones Without Principals Do," NBER Working Papers 7604, National Bureau of Economic Research, Inc.
    2. Spence, Michael & Zeckhauser, Richard, 1971. "Insurance, Information, and Individual Action," American Economic Review, American Economic Association, vol. 61(2), pages 380-387, May.
    3. George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(4), pages 543-569.
    4. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-139, May.
    5. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
    6. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
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    Cited by:

    1. Hayat Khan, 2019. "A Nontechnical Guide on Optimal Incentives for Islamic Insurance Operators," JRFM, MDPI, vol. 12(3), pages 1-14, July.
    2. Suren Basov & Svetlana Danilkina, 2010. "Multitasking, Multidimensional Screening, and Moral Hazard with Risk Neutral Agents," The Economic Record, The Economic Society of Australia, vol. 86(s1), pages 80-86, September.
    3. Suren Basov, 2013. "Emotional Temperature, Probabilistic Choice and the Optimal Power of Incentives," The Economic Record, The Economic Society of Australia, vol. 89, pages 84-94, June.
    4. Suren Basov & Svetlana Danilkina & David Prentice, 2020. "When Does Variety Increase with Quality?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 56(3), pages 463-487, May.
    5. Suren Basov, 2010. "Simulation and Inference for Stochastic Differential Equations: With R Examples," The Economic Record, The Economic Society of Australia, vol. 86(272), pages 137-140, March.

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    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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