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On Inducing Agents with Term Limits to Take Appropriate Risk

Author

Listed:
  • Rohan DUTTA
  • Pierre-Yves YANNI

Abstract

A principal needs agents to appropriately select a risky action over a safe one, with replacement as the only incentivizing tool. Agents wish solely to re- main in office and the risky action can reveal his decision-making competence. Aghion and Jackson (2017) show how the inability to commit to a retention pol- icy severely limits the principal’s welfare. We study this problem when agents face two-period term limits and find that this helps the principal considerably. The term limit structure allows the principal to mimic the ability to make commitments and enforce a random dismissal rule following the safe action. The incentive problem becomes even less severe if the agent has private information about his competence and the stakes are high.

Suggested Citation

  • Rohan DUTTA & Pierre-Yves YANNI, 2017. "On Inducing Agents with Term Limits to Take Appropriate Risk," Cahiers de recherche 06-2017, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    • Handle: RePEc:mtl:montec:06-2017
    as

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    References listed on IDEAS

    as
    1. Philippe Aghion & Matthew O. Jackson, 2016. "Inducing Leaders to Take Risky Decisions: Dismissal, Tenure, and Term Limits," American Economic Journal: Microeconomics, American Economic Association, vol. 8(3), pages 1-38, August.
    2. Banks, Jeffrey S. & Sundaram, Rangarajan K., 1998. "Optimal Retention in Agency Problems," Journal of Economic Theory, Elsevier, vol. 82(2), pages 293-323, October.
    3. Duggan, John, 2017. "Term limits and bounds on policy responsiveness in dynamic elections," Journal of Economic Theory, Elsevier, vol. 170(C), pages 426-463.
    4. Ying Chen, 2015. "Career Concerns and Excessive Risk Taking," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 24(1), pages 110-130, March.
    5. John Duggan & César Martinelli, 2017. "The Political Economy of Dynamic Elections: Accountability, Commitment, and Responsiveness," Journal of Economic Literature, American Economic Association, vol. 55(3), pages 916-984, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    term-limits; elections; principal-agent; discretion; replacement;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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