stochastic mechanisms in settings without monetary transfers the regular case abstract we analyze relative performance of stochastic and deterministic mechanisms in an environment that has been extensively studied in the literature on communication e g vincent p crawford joel sobel strategic information transmission econometrica 50 6 1982 1431 1451 and optimal delegation e g bengt holmstrom on the theory of delegation in m boyer r e kihlstrom eds bayesian models in economic theory north holland 1984 pp 115 141 a principal agent model with hidden information no monetary transfers and single peaked preferences we demonstrate that under the common assumption of quadratic payoffs and a certain regularity condition on the distribution of private information and the agent s bias the optimal mechanism is deterministic we also provide an explicit characterization of this mechanism

delegation and incentives this article analyzes the relation between authority and incentives it extends the standard principal agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority the agent s subsequent choice of effort depends both on monetary incentives and the selected project we find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent in fact if the agent is protected by limited liability delegation is never optimal

contracts with endogenous information abstract i study covert information acquisition and reporting in a principal agent problem allowing for general technologies of information acquisition when posteriors satisfy two dimensional versions of the standard first order stochastic dominance and concavity convexity of the distribution function conditions a first order approach is justified under the same conditions informativeness and riskiness of reports are equivalent high powered contracts that make the agent s informational rents more risky are used to increase incentives for information acquisition insensitive contracts are used to reduce incentives for information gathering the value of information to the agent is always positive the value of information to the principal is ambiguous

minority voting rights can maximize majority welfare i use condorcet s information aggregation model to show that sometimes the best possible decision procedure for the majority allows the minority to enforce its favored outcome even when overruled by a majority special voting power gives the minority an incentive to participate meaningfully and more participation means more information is aggregated which makes the majority better off this result can be understood as a mathematical corroboration of lani guinier s arguments that voting procedures can be designed to encourage minority participation benefitting everyone

opinions as incentives we study costs and benefits of differences of opinion between an adviser and a decision maker even when they share the same underlying preferences over decisions a difference of opinion about payoff relevant information leads to strategic information acquisition and transmission a decision maker faces a fundamental trade off a greater difference of opinion increases an adviser s incentives to acquire information but exacerbates the strategic disclosure of any information that is acquired nevertheless when choosing from a rich pool of opinion types it is optimal for a decision maker to select an adviser with some difference of opinion centralization of authority is essential to harness these incentive gains since delegation to the adviser can discourage effort

compensating differentials and the social benefits of the nfl a comment abstract in a recent article in this journal carlino and coulson g carlino n e coulson compensating differentials and the social benefits of the nfl journal of urban economics 56 1 2004 25 50 report evidence that the presence of an nfl franchise in a city raises rents in the central part of the city by about 8 we re estimate their model using several reasonable alternative specifications and find that their results are not robust to these changes the presence of an nfl franchise does not appear to increase rents for center city apartments because their results are not robust to alternative model specifications they should not be used to justify public spending for professional sports facilities

delegation to a possibly ignorant agent in a delegation problem an uninformed principal delegates decision making powers to a biased and possibly ignorant agent the principal cannot use monetary payments but can restrict the set of the agent s choices i show that in the general case the principal may offer a disconnected set of choices in a setting with arbitrary bias the uncertainty principle holds the principal benefits as the likelihood that the agent is informed increases when the bias is constant i show that the ally principle holds the principal benefits as the bias becomes smaller finally when the likelihood of the agent being informed is determined by the agent s effort then for small biases the principal benefits from limiting the agent s choice when the agent is sufficiently biased the principal gives more choice to the agent so as to to improve incentives for information acquisition

a theory of delegated search for the best alternative searching for the best worker a reliable supply alternative or the most profitable investment is frequently delegated to an agent this article develops a theory of delegated search we show that the principal s ability to delegate depends on the agent s luck her initial resources and the contract that governs her search with moral hazard the optimal contract is characterized by performance deadlines with bonuses for early completion if performance cannot be specified the optimal search is implemented by an option to buy contract for the principal if performance is partially specified the optimal contract is a standard pay for performance arrangement

how much discretion for risk regulators we analyze the regulation of firms that undertake socially risky activities but can reduce the probability of an accident inflicted on third parties by carrying out non verifiable effort congress delegates regulation to an agency although these two bodies may have different preferences toward the industry the optimal level of discretion left to the agency results from the following trade off the agency can tailor discretionary policies to its expert knowledge about potential harm but it implements policies that are too pro industry the agency should be given full discretion when the firm is solvent partial discretion is preferred otherwise we then investigate how this trade off changes as the political and economic landscapes are modified

optimal forecasting incentives an agent of unknown expertise is requested to forecast the mean of an uncertain outcome the agent can refine forecasts at a constant marginal cost per unit precision but neither cost nor precision can be verified by the planner the problem is to induce both truthful revelation and an appropriate degree of learning so as to minimize the expected sum of direct planning losses and agent payments optimal contracts are derived with and without self screening of expertise and with and without competition between agents self screening tends to be much less valuable than competition

a theory of yes men this paper illustrates an incentive for workers to conform to the opinion of their supervisors when firms use subjective performance evaluation this desire to conform arises endogenously from the firm s need to induce the worker to exert effort the author shows that firms may optimally eschew the use of incentive contracts to retain workers incentives for honesty the author illustrates that the incentive to conform implies inefficiencies even when workers are risk neutral and is likely to lead to more centralized decision making than in the absence of the desire to conform copyright 1993 by american economic association

the economics of clear advice and extreme options i study a principal agent model in which the agent collects information and then chooses a verifiable action i show that the principal can find it desirable to constrain the agent s action set even though there is no disagreement about the ranking of actions ex post the elimination or penalization of intermediate actions which are optimal when information is poor improves incentives for information collection i characterize optimal action sets when the agent is infinitely risk averse with respect to income shocks and optimal incentive schemes when the agent is risk neutral copyright 2005 wiley blackwell

delegated information acquisition with moral hazard abstract we analyze a principal agent problem with moral hazard where a principal searches for an opportunity of uncertain return and hires an agent to evaluate available options the agent s effort affects the informativeness of a signal about an option s return based on the information provided by the agent the principal decides whether to exercise the option at hand we derive properties of the optimal contract in both static and dynamic versions of the problem we show that there are intermediate values of the prior probability that the option is of high quality at which positive effort cannot be sustained we also show that if the prior is below a threshold then the agent is rewarded for delivering bad news about the option s quality we derive distortions relative to the first best on the implemented effort level and optimal stopping decision for some parameter values it is optimal for the principal to commit to an ex post suboptimal stochastic decision to exercise an option

ignorance in agency problems we extend the standard agency model of adverse selection to incorporate the possibility that the agent may be ignorant i e know no more about a critical parameter than does the principal ignorance introduces a discontinuity pooling and particularly severe output distortions into the optimal incentive contract journal of economic literature classification numbers c79 d82

a theory of conservatism a free rider problem arises when a group choice between two alternatives has to be made on the basis of privately collected evidence leading to insufficient effort in gathering evidence and an ex ante welfare loss for the group to alleviate the free rider problem the group can commit to a conservative rule whereby the decision is made against the alternative favored by the group s preference or prior when evidence supports it but is not preponderant optimal conservatism increases private incentives to gather evidence and improves the quality of the group decision my result explains why sometimes groups appear overly cautious toward favored alternatives

optimal delegation via a strategic intermediary abstract this paper studies the optimal design of delegation rule in a three tier principal intermediary agent hierarchy in this hierarchy monetary transfer is not feasible delegation is made sequentially and all players are strategic we characterize the optimal delegation mechanism it is shown that the single interval delegation a la holmstrom is optimal only when the intermediary is moderately biased otherwise as responses to the distortion caused by a biased intermediary the optimal delegation set may involve a hole thus multi interval delegation set would arise when subordinates have opposing biases this result sheds some light on policy threshold effects slight changes in the underlying state cause a jump in the policy responses

too much information information provision and search costs a seller often needs to determine the amount of product information to provide to consumers we model costly consumer information search in the presence of limited information we derive the consumer s optimal stopping rule for the search process we find that in general there is an intermediate amount of information that maximizes the likelihood of purchase if too much information is provided some of it is not as useful for the purchase decision the average informativeness per search occasion is too low and consumers end up choosing not to purchase the product if too little information is provided consumers may end up not having sufficient information to decide to purchase the product the optimal amount of information increases with the consumer s ex ante valuation of the product because with greater ex ante valuation by the consumer the firm wants to offer sufficient information for the consumer to be less likely to run out of information to check one can also show that there is an intermedi

full extraction of the surplus in bayesian and dominant strategy auctions we consider auctions for a single indivisible object in the case where the bidders have information about each other which is not available to the seller we show that the seller can use this information to his own benefit and we completely characterize the environ ments in which a well chosen auction gives him the same expected payoff as that obtainable were he able to sell the object with full information about each bidder s willingness to pay we provide this characterization for auctions in which the bidders have dominant strate gies and for those where the relevant equilibrium concept is bayesian nash in both set ups the existence of these auctions hinges on the possibility of constructing lotteries with the correct properties we consider the situation in which an agent the seller possesses one indivisible unit of a good to which he attaches no value but the good has value to a number of potential buyers and its transfer to one of them would increase social welfare in particular the transfer to the buyer with the highest valuation maximizes social welfare in this paper we completely characterize environments in which the seller can design an auction that will enable him to capture for himself the full increase in social welfare induced by the transfer of the good to the bidder with the highest willingness to pay if the seller had full information about the reservation prices of potential buyers his optimal selling strategy would be very simple he would announce a price equal or very close to the highest reservation value the optimal strategy for the bidder with the highest evaluation would be to accept the offer note that we are treating a situation in which the seller can commit himself to a price as a result of the exchange the utility of the seller increases by the full amount of the increase in social welfare and he has been able to fully extract the surplus in many circumstances however a seller has only imperfect knowledge of the buyers willingnesses to pay in this case he must find some mechanism or auction which will enable him to maximize his benefit from the sale of the object the auction literature starts with this observation and shows how the seller can by an astute choice of auction extract the largest possible fraction of the surplus in general the literature has shown that this proportion is strictly less than one in some circumstances the bidders will have information about each other which is not available to the seller for instance in auctions for petroleum drilling rights bidders know the results of geological tests which they have

pessimistic information gathering an agent gathers information on productivity shocks and accordingly produces on behalf of a principal information gathering is imperfect and whether it succeeds or not depends on the agent s effort contracting frictions come from the fact that the agent is pessimistic on the issue of information gathering and there are both moral hazard in information gathering private information on productivity shocks and moral hazard on operating effort an optimal menu of linear contracts mixes high powered productivity dependent screening options following good news with a fixed low powered option otherwise

managerial incentives and capital management the paper shows how career concerns rather than effort aversion can induce a natural incongruity in risk preferences between managers and superiors a model based on learning about managerial talent is developed to study second best contractual remedies we show that the optimal wage contract is an option of the value of the manager s human capital for insurance reasons and that consequently rationing of capital is often required to counterbalance the manager s resulting incentive to overinvest rationing is strictly superior to price decentralization offering one reason for the prevalence of centralized capital budgeting procedures

optimal limited authority for principal abstract this article studies a principal agent problem where the only commitment for the uninformed principal is to restrict the set of decisions she makes following a report by the informed agent we show that an ex ante optimal equilibrium for the principal corresponds to a finite partition of the state space and each retained decision is ex post suboptimal for the principal biased toward the agent s preference generally an optimal equilibrium does not maximize the number of decisions the principal can credibly retain compared to no commitment limited authority improves the quality of communication from the agent as a result it can give the principal a higher expected payoff than delegating the decision to the agent

learning in equilibrium models of arbitration this paper analyzes strategic communication in equilibrium models of conventional and final offer interest arbitration both models emphasize the role of learning by the arbitrator from the parties offers about the state of the employment relationship which is known to the parties but not to the arbitrator in both models the arbitrators equilibrium behavior is identical to the reduced form decision rule typically assumed in the empirical literature the paper thereby provides a structural interpretation for the existing empirical work the paper also represents progress towards a complete theory of arbitration because it satisfies three conditions that will be required of any such theory first the models predictions match the existing empirical evidence second the models describe equilibrium behavior and third the models are built on a common set of assumptions about preferences information and commitment the paper therefore not only provides an equilibrium foundation for the intuition that the arbitrator might learn from the parties offers but also uses the idea of learning to develop a unified analytical treatment of the two major forms of interest arbitration this abstract was borrowed from another version of this item