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Production Externalities and Two-Way Distortion in Principal-Multi-Agent Problems

  • Lockwood, B.

    (Department of Economics, University of Warwick)

This paper studies an otherwise standard principal-agent problem with hidden information, but whether there are positive production externalities between agents: the output of any agent depends positively on the effort expended by the other agents. It is shown that the optimal contract for the principal exhibits two-way distortion: the effort of any agent is oversupplied (relative to the first-best) when his marginal cost effort is low, and undersupplied his marginal cost of effort is high. This pattern of distortion cannot otherwise arise in optimal single- or multi-agent incentive contracts, unless there are countervailing incentives. However, unlike the countervailing incentives case, the pattern of distortion is robust to the precise form of the externality.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twoway1.pdf
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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 527.

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Length: 27 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:wrk:warwec:527
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Web page: http://www2.warwick.ac.uk/fac/soc/economics/

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  1. Maggi G. & Rodriguez-Clare A., 1995. "On Countervailing Incentives," Journal of Economic Theory, Elsevier, vol. 66(1), pages 238-263, June.
  2. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-64, June.
  3. Itoh, Hideshi, 1991. "Incentives to Help in Multi-agent Situations," Econometrica, Econometric Society, vol. 59(3), pages 611-36, May.
  4. Lewis, Tracy R. & Sappington, David E. M., 1989. "Countervailing incentives in agency problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 294-313, December.
  5. Mookherjee, Dilip, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 433-46, July.
  6. Baron, David P & Myerson, Roger B, 1982. "Regulating a Monopolist with Unknown Costs," Econometrica, Econometric Society, vol. 50(4), pages 911-30, July.
  7. Mas-Colell, Andreu, 1984. "On a theorem of Schmeidler," Journal of Mathematical Economics, Elsevier, vol. 13(3), pages 201-206, December.
  8. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  9. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
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