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Incentives for Boundedly Rational Agents

  • Basov Suren

    ()

    (Melbourne University)

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.

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Article provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.

Volume (Year): 3 (2003)
Issue (Month): 1 (June)
Pages: 1-16

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Handle: RePEc:bpj:bejtec:v:topics.3:y:2003:i:1:n:2
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  1. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  2. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  3. Spence, Michael & Zeckhauser, Richard, 1971. "Insurance, Information, and Individual Action," American Economic Review, American Economic Association, vol. 61(2), pages 380-87, May.
  4. Ross, Stephen A, 1973. "The Economic Theory of Agency: The Principal's Problem," American Economic Review, American Economic Association, vol. 63(2), pages 134-39, May.
  5. Marianne Bertrand & Sendhil Mullainathan, 2000. "Do CEOs Set Their Own Pay? The Ones Without Principals Do," Working Papers 810, Princeton University, Department of Economics, Industrial Relations Section..
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