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Incentive Structures Maximizing Residual Gain under Incomplete Information

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  • Leonid Hurwicz
  • Leonard Shapiro

Abstract

In a two-agent setting, one agent ("landlord") seeks to maximize his residual gain, i.e., that part of output remaining after payment of a reward to the other agent ("worker"). The reward must be a function of the worker's output since his effort cannot be directly observed, and the landlord must choose this function without knowing the worker's disutility and productivity parameters. A 50-50 split turns out to be the maximin (regret) solution in a broad class of cases, even if discontinuous reward functions are permitted. This "sharecropping" model suggests itself in problems where the first agent represents the government and the residual gain serves a paramount national or social objective.

Suggested Citation

  • Leonid Hurwicz & Leonard Shapiro, 1978. "Incentive Structures Maximizing Residual Gain under Incomplete Information," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 180-191, Spring.
  • Handle: RePEc:rje:bellje:v:9:y:1978:i:spring:p:180-191
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    Cited by:

    1. Sylvain Chassang & Gerard Padro i Miquel, 2014. "Corruption, Intimidation, and Whistleblowing: A Theory of Inference from Unverifiable Reports," Working Papers 062-2014, Princeton University, Department of Economics, Econometric Research Program..
    2. William E. James & James A. Roumasset, 1979. "Explaining Variations In Share Contracts: Land Quality, Population Pressure And Technological Change," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 23(2), pages 116-127, August.
    3. Carroll, Gabriel & Meng, Delong, 2016. "Robust contracting with additive noise," Journal of Economic Theory, Elsevier, vol. 166(C), pages 586-604.
    4. Li, Yan & Qiu, Yueming & Wang, Yi David, 2014. "Explaining the contract terms of energy performance contracting in China: The importance of effective financing," Energy Economics, Elsevier, vol. 45(C), pages 401-411.
    5. Sylvain Chassang, 2013. "Calibrated Incentive Contracts," Econometrica, Econometric Society, vol. 81(5), pages 1935-1971, September.
    6. Demeze, Herman & Moyouwou, Issofa & Pongou, Roland, 2016. "The Welfare Economics of Tactical Voting in Democracies: A Partial Identification Equilibrium Analysis," MPRA Paper 70607, University Library of Munich, Germany.
    7. Vinicius Carrasco & Vitor Farinha Luz & Paulo Monteiro & Humberto Moreira, 2015. "Robust Mechanisms: the curvature case," Textos para discussão 642, Department of Economics PUC-Rio (Brazil).
    8. Urmee Khan & Martin Dumav, 2018. "Moral Hazard, Uncertain Technologies, and Linear Contracts," Working Papers 201806, University of California at Riverside, Department of Economics.
    9. Herman Demeze & Issofa Moyouwou & Roland Pongou, 2016. "The Welfare Economics of Tactical Voting in Democracies: A Partial Identification Equilibrium Analysis," Working Papers 1611e, University of Ottawa, Department of Economics.
    10. Ollier, Sandrine & Thomas, Lionel, 2013. "Ex post participation constraint in a principal–agent model with adverse selection and moral hazard," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2383-2403.

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