IDEAS home Printed from https://ideas.repec.org/p/cda/wpaper/132.html
   My bibliography  Save this paper

Common Shocks and Relative Compensation Schemes

Author

Listed:
  • Martine Quinzii
  • Michael Magill

    (Department of Economics, University of California Davis)

Abstract

This paper studies qualitative properties of an optimal contract in a multi-agent setting in which agents are subject to a common shock. We derive a necessary and sufficient condition for the optimal reward of an agent to be a decreasing (increasing) function of the outputs of the other agents, under the assumption that the agents' outputs are informative signals of the value of the common shock. The condition is that the likelihood ratio of a given outcome with high versus low effort be a decreasing (increasing) function of the common shock. We derive conditions on the way the common shock affects the marginal product of effort under which the likelihood ratio is decreasing for all output levels, or increasing for some output levels and decreasing for others.

Suggested Citation

  • Martine Quinzii & Michael Magill, 2005. "Common Shocks and Relative Compensation Schemes," Working Papers 132, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:132
    as

    Download full text from publisher

    File URL: https://repec.dss.ucdavis.edu/files/VifM8s65q1SNonn2XwUXpKws/05-2.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michael Magill & Martine Quinzii, 2005. "An Equilibrium Model of Managerial Compensation," IEPR Working Papers 05.22, Institute of Economic Policy Research (IEPR).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stefanie Stantcheva, 2020. "Dynamic Taxation," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 801-831, August.
    2. Arantxa Jarque, 2010. "Hidden effort, learning by doing, and wage dynamics," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 96(4Q), pages 339-372.
    3. Clausen, Andrew, 2013. "Moral Hazard with Counterfeit Signals," SIRE Discussion Papers 2013-13, Scottish Institute for Research in Economics (SIRE).
    4. Santos, Joao C., 1997. "Debt and equity as optimal contracts," Journal of Corporate Finance, Elsevier, vol. 3(4), pages 355-366, December.
    5. Demougin, Dominique M. & Fabel, Oliver, 2006. "The division of ownership in new ventures," SFB 649 Discussion Papers 2006-047, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    6. Tarkka, Juha, 1994. "Implicit interest as price discrimination in the bank deposit market," Research Discussion Papers 1/1994, Bank of Finland.
    7. Ohad Kadan & Philip J. Reny & Jeroen M. Swinkels, 2017. "Existence of Optimal Mechanisms in Principal‐Agent Problems," Econometrica, Econometric Society, vol. 85, pages 769-823, May.
    8. Thomas Schacherer, 2015. "Deterministic versus stochastic contracts in a dynamic principal-agent model," BDPEMS Working Papers 2015013, Berlin School of Economics.
    9. Charles Leung & Sam Tang & Nicolaas Groenewold, 2006. "Growth Volatility and Technical Progress: A Simple Rent-seeking Model," Journal of Economics, Springer, vol. 88(2), pages 159-178, August.
    10. Chang, Roberto & Hevia, Constantino & Loayza, Norman, 2018. "Privatization And Nationalization Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 22(2), pages 331-361, March.
    11. Garrett, Daniel F. & Georgiadis, George & Smolin, Alex & Szentes, Balázs, 2023. "Optimal technology design," Journal of Economic Theory, Elsevier, vol. 209(C).
    12. Neira, Julian, 2019. "Bankruptcy and cross-country differences in productivity," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 359-381.
    13. Martin Byford, 2003. "Moral Hazard From Costless Hidden Actions," Working Papers 2003.03, School of Economics, La Trobe University.
    14. Lee, Hangsuck & Ha, Hongjun & Lee, Minha, 2024. "A sharing rule for multi-period interest-sensitive insurance contracts," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).
    15. Matthias Lang, 2023. "Stochastic contracts and subjective evaluations," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 104-134, March.
    16. Oliver Fabel, 1990. "Implicit contracts with effort incentives," Journal of Economics, Springer, vol. 52(1), pages 25-42, February.
    17. Nahum D. Melumad, 1989. "Asymmetric information and the termination of contracts in agencies," Contemporary Accounting Research, John Wiley & Sons, vol. 5(2), pages 733-753, March.
    18. Ghossoub, Mario, 2010. "Supplement to "Belief heterogeneity in the Arrow-Borch-Raviv insurance model"," MPRA Paper 37717, University Library of Munich, Germany, revised 22 Mar 2012.
    19. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2008. "Moral Hazard, Income Taxation and Prospect Theory," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(2), pages 321-337, June.
    20. Kevin Gross & Carl T Bergstrom, 2024. "Rationalizing risk aversion in science: Why incentives to work hard clash with incentives to take risks," PLOS Biology, Public Library of Science, vol. 22(8), pages 1-15, August.

    More about this item

    Keywords

    optimal incentive contracts; common shocks; multi agents; monotone likelihood ratio;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cda:wpaper:132. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Letters and Science IT Services Unit (email available below). General contact details of provider: https://edirc.repec.org/data/educdus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.