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Optimal Incentive Schemes When Only the Agents' "Best" Output Matters to the Principal


  • Steven D. Levitt


Standard principal-agent models assume that the principal's payoff is a function of the total output of all agents. In many real-world situations, however, the principal's payoff is based solely on the "best" of the agents' outputs (e.g., the first agent to make an innovation, the most creative advertising campaign, or the cheapest product design). The results obtained from such a model differ from the standard results in a number of respects. For instance, even when identical agents perform identical tasks, the optimal incentive scheme will often differ across agents. Also, the principal may want to increase the variance of the agents' output or reduce the correlation of output across agents, even when the agents are risk averse.

Suggested Citation

  • Steven D. Levitt, 1995. "Optimal Incentive Schemes When Only the Agents' "Best" Output Matters to the Principal," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 744-760, Winter.
  • Handle: RePEc:rje:randje:v:26:y:1995:i:winter:p:744-760

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    References listed on IDEAS

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    7. Bonanno, Giacomo & Vickers, John, 1988. "Vertical Separation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(3), pages 257-265, March.
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    Cited by:

    1. Wallace E. Huffman & Richard E. Just, 2000. "Setting Efficient Incentives for Agricultural Research: Lessons from Principal-Agent Theory," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 828-841.
    2. Esther Gal-Or, 1997. "Multiprincipal Agency Relationships as Implied by Product Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 235-256, June.
    3. Thomas, Jonathan P. & Wang, Zhewei, 2013. "Optimal punishment in contests with endogenous entry," Journal of Economic Behavior & Organization, Elsevier, vol. 91(C), pages 34-50.
    4. Jovanovic, Dragan, 2013. "Mergers, managerial incentives, and efficiencies," DICE Discussion Papers 88, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    5. Scott M Gilpatric, 2009. "Risk Taking In Contests And The Role Of Carrots And Sticks," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 266-277, April.
    6. Barbieri, Stefano & Malueg, David A., 2016. "Private-information group contests: Best-shot competition," Games and Economic Behavior, Elsevier, vol. 98(C), pages 219-234.
    7. Baliga, Sandeep & Sjostrom, Tomas, 2001. "Optimal Design of Peer Review and Self-Assessment Schemes," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 27-51, Spring.
    8. David Pérez-Castrillo & David Wettstein, 2012. "Innovation Contests," Working Papers 654, Barcelona Graduate School of Economics.
    9. repec:eee:labchp:v:3:y:1999:i:pc:p:3529-3571 is not listed on IDEAS
    10. Huffman, Wallace E., 1999. "Finance, Organization, and Impacts of U.S. Agricultural Research: Future Prospects," ISU General Staff Papers 199903010800001315, Iowa State University, Department of Economics.
    11. Park, Timothy A. & Lohr, Luanne, 2007. "Performance evaluation of university extension providers: A frontier approach for ordered response data," European Journal of Operational Research, Elsevier, vol. 182(2), pages 899-910, October.
    12. Huffman, Wallace E., 1999. "New Insights on the Organization of Agricultural Research: Theory and Evidence for Western Developed Countries," ISU General Staff Papers 199907010700001319, Iowa State University, Department of Economics.
    13. Agranov, Marina & Tergiman, Chloe, 2013. "Incentives and compensation schemes: An experimental study," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 238-247.

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