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Principal-Agent Problems When Principal Allocates a Budget

Author

Listed:
  • Kimiko Terai

    (Faculty of Economics, Keio University)

  • Amihai Glazer

    (Department of Economics, University of California, Irvine)

Abstract

Agents benefit from having the principal believe that they share his preferences, whereas the principal may prefer that agents reveal their types. Such incentives are explored in a model which considers a principal who sets a budget in each of two periods, that each of the two agents allocates among different services. In the second period, the principal, having observed the agents' behavior in the first period, gives a larger budget to the agent he believes more likely shares the principal's preferences. Each agent may behave strategically, spending his budget on the service he thinks the principal prefers, thereby hiding his type. The principal may induce agents to reveal their types by hiding from them his preferences, or by giving them a large budget in the initial period. Such an approach, however, may lead agents in the initial period to spend too much on services the principal little values.

Suggested Citation

  • Kimiko Terai & Amihai Glazer, 2015. "Principal-Agent Problems When Principal Allocates a Budget," Keio-IES Discussion Paper Series 2015-012, Institute for Economics Studies, Keio University.
    • Handle: RePEc:keo:dpaper:2015-012
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    File URL: http://ies.keio.ac.jp/upload/pdf/en/DP2015-012.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    delegation; budget; hidden information; fedeCognitive and Non-cognitive Abilities;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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