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Multi-Group Incentives

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  • Hitoshi Matsushima

    (Faculty of Economics, University of Tokyo)

Abstract

This paper investigates the agency problem with moral hazard, where the principal hires multiple agents, and can only imperfectly monitor their action choices by observing their correlated public signals. The principal will penalize any detected deviant only by firing her and other agents. The key assumption of the paper is that agents are divided into multiple distinct groups. Within each group, all its members can make the binding commitments to achieve their collusive action choices. It is shown that it may be easier to provide the agents with the incentive to make the most desired action choices when multiple groups are established than when either no group or only the grand group is established. It is also shown that in terms of uniqueness, relative performance evaluation through inter-group competition will work better than that through inter-individual competition.

Suggested Citation

  • Hitoshi Matsushima, 2003. "Multi-Group Incentives," CIRJE F-Series CIRJE-F-201, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2003cf201
    as

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2003/2003cf201.pdf
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    References listed on IDEAS

    as
    1. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    2. Matsushima, Hitoshi, 2001. "Multimarket Contact, Imperfect Monitoring, and Implicit Collusion," Journal of Economic Theory, Elsevier, vol. 98(1), pages 158-178, May.
    3. Dilip Mookherjee, 1984. "Optimal Incentive Schemes with Many Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 433-446.
    4. Macho-Stadler, Ines & Perez-Castrillo, J. David, 1993. "Moral hazard with several agents : The gains from cooperation," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 73-100, March.
    5. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    6. Legros, Patrick & Matsushima, Hitoshi, 1991. "Efficiency in partnerships," Journal of Economic Theory, Elsevier, vol. 55(2), pages 296-322, December.
    7. Ching-To Ma, 1988. "Unique Implementation of Incentive Contracts with Many Agents," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 555-572.
    8. Itoh Hideshi, 1993. "Coalitions, Incentives, and Risk Sharing," Journal of Economic Theory, Elsevier, vol. 60(2), pages 410-427, August.
    9. Aoki,Masahiko, 1990. "Information, Incentives and Bargaining in the Japanese Economy," Cambridge Books, Cambridge University Press, number 9780521386814.
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    Cited by:

    1. Hitoshi Matsushiima, 2006. "Relative Performance Evaluation between Multitask Agents," CARF F-Series CARF-F-067, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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