a principal agent problem with heterogeneous demand distributions for a carbon capture and storage system abstract mechanism design problems optimize contract offerings from a principal to different types of agents who have private information about their demands for a product or a service we study the implications of uncertainty in agents demands on the principal s contracts specifically we consider the setting where agents demands follow heterogeneous distributions and the principal offers a menu of contracts stipulating quantities and transfer payments for each demand distribution we present analytical solutions for the special case when there are two distributions each taking two discrete values as well as a method for deriving analytical solutions from numerical solutions we describe one application of the model in carbon capture and storage systems to demonstrate various types of optimal solutions and to obtain managerial insights

the form of incentive contracts agency with moral hazard risk neutrality and limited liability the analysis obtains a complete characterization of the optimal agency contract with moral hazard risk neutrality and limited liability we introduce a critical ratio that indicates the returns to providing the agent with incentives for effort in each random state the form of the contract is debt a capped bonus when the critical ratio is increasing decreasing in the state an increasing critical ratio in the state space setting corresponds to the hazard rate order for the reduced form distribution of output which we term the decreasing hazard rate in effort property dhrep the critical ratio also yields insights into agency with adverse selection

producer price risk and quality measurement risk averse farmers in the produce industry grow a product whose market price is often quite unpredictable shippers or other intermediaries shield the farmer from much of this price risk however actual contracts between growers and shippers vary considerably across commodities in the residual price risk growers face we hypothesize that imperfect quality measurement results in a moral hazard problem and that price provides additional information regarding quality as a consequence an efficient contract does not shield growers from all idiosyncratic price risk we examine this hypothesis for the case of fresh market tomatoes

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

existence and non existence in the moral hazard problem abstract we provide a new class of counter examples to existence in a simple moral hazard problem in which the first order approach is valid in contrast to the mirrlees example unbounded likelihood ratios on the signal technology are not central rather our examples center around the behavior of the utility function as utility diverges to negative infinity for any utility function such as ln w in which utility diverges to negative infinity at a finite wealth level existence will fail for some specifications of the agent s cost of effort when utility diverges to negative infinity only as wealth does as well existence holds for all specifications of the agent s cost of effort if and only if the agent continues to dislike risk as wealth diverges to negative infinity when there is a finite lower bound on utility existence is assured for those cases where existence fails we characterize the limit of near optimal contracts

moral hazard in strategic decision making abstract this paper develops a theory of moral hazard in which the agent takes the role of strategic decision maker career concerns give rise to preferences over risk which in turn create an incentive for the agent to manipulate the project s risk return tradeoff to the disadvantage of the principal the resultant moral hazard can be ameliorated by an incentive contract the optimal non decreasing wage involves granting in the money options in the context of academic tenure the optimal tenure standard requires the agent to exceed expectations and lies within one standard deviation of the expected outcome

optimal vs traditional securities under moral hazard this paper provides an explanation for the widespread use of traditional securities by wellestablished firms standard moral hazard models predict that equity debt and warrants are almost never optimal financing instruments i show that issuing these securities is nevertheless nearly optimal the issuer would gain very little by using non traditional securities instead combined with equity one debt issue without multiple layers of seniority and one warrant issue without multiple exercise prices suffice to achieve near optimality the near optimality of traditional financing depends crucially on the issuer s ability to use war rants in addition to debt and equity

optimal incentive contracts under inequity aversion we analyze the classic moral hazard problem with the additional assumption that agents are inequity averse the presence of inequity aversion alters the structure of optimal contracts when the concern for equity becomes more important there is convergence towards linear sharing rules the sufficient statistics result is violated depending on the environment contracts may be either overdetermined i e include non informative performance measures or incomplete i e neglect informative performance measures finally our model delivers a simple rationale for team based incentives implying wage compression 2010 elsevier inc

optimal contracts under adverse selection and moral hazard a continuous time approach this article presents a continuous time agency model in the presence of adverse selection and moral hazard with a risk averse agent and a risk neutral principal under the model setup we show that the optimal controls are constant over time and thus the optimal menu consists of contracts that are linear in the final outcome we also show that when a moral hazard problem adds to an adverse selection problem the monotonicity condition well known in the pure adverse selection literature needs to be modified to ensure the incentive compatibility for information revelation the model is applied to a few managerial compensation problems involving managerial project selection and capital budgeting decisions we argue that in the third best world the relationship between the volatility of the outcome and the sensitivity of the contract depends on interactions between the managerial cost and the firm s production functions contrary to conventional wisdom sometimes the higher the volatility the higher the sensitivity of the contract the firm receiving good news sometimes chooses safer projects or invests less than it does with bad news we also examine the effects of the observability of the volatility on corporate investment decisions copyright 2005 oxford university press

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

james mirrlees contributions to the theory of information and incentives the theory of information and incentives has revolutionized economics we now understand how markets and other modes of private economic transaction as well as public policy are affected when different participants have different information or when the actions of some participants are not observable to others mirrlees has made pathbreaking contributions arguably the two most important contributions to the development of these ideas and methods of analysis his review of economic studies article 1971c on optimal nonlinear income taxation introduced a technique that evolved into the revelation principle which fully characterizes all policies that are incentive compatible or feasible under information asymmetry this technique is now the workhorse model for numerous applications his bell joumal of economics article 1976a on hierarchies and organizations and some of his important unpublished yet widely circulated papers referred to below played a similar role for the theory of the design of incentives to induce effort he identified the precise way in which observable outcomes convey probabilistic information about the underlying unobservable action and thereby clarified how rewards or punishments based on outcomes can serve as incentives to action mirrlees developed these ideas in the context of specific applications however they are truly fundamental to economic theory and they have profoundly influenced subsequent thinking and research on the design of

a solvable continuous time dynamic principal agent model abstract i study the provision of incentives in a continuous time dynamic moral hazard model with hidden actions and hidden states i consider a principal agent model with linear production and exponential utility whose explicit solution allows me to show how allocations are distorted for incentive reasons and how access to hidden savings further alters allocations i solve the model by applying a stochastic maximum principle where the co state variables from the agent s optimization problem become state variables for the principal s problem of choosing an optimal contract i show that the main effect of moral hazard is a distortion on the effort margin with a smaller effect on the intertemporal consumption allocation access to hidden savings shuts down the intertemporal distortions and increases the effort distortion i also show how the optimal contracts can be implemented via a constant equity share a constant flow payment and a constant tax on savings

dynamic financial constraints distinguishing mechanism design from exogenously incomplete regimes we formulate and solve a range of dynamic models of constrained credit insurance that allow for moral hazard and limited commitment we compare them to full insurance and exogenously incomplete financial regimes autarky saving only borrowing and lending in a single asset we develop computational methods based on mechanism design linear programming and maximum likelihood to estimate compare and statistically test these alternative dynamic models with financial information constraints our methods can use both cross sectional and panel data and allow for measurement error and unobserved heterogeneity we estimate the models using data on thai households running small businesses from two separate samples we find that in the rural sample the exogenously incomplete saving only and borrowing regimes provide the best fit using data on consumption business assets investment and income family and other networks help consumption smoothing there as in a moral hazard constrained regime in contrast in urban areas we find mechanism design financial information regimes that are decidedly less constrained with the moral hazard model fitting best combined business and consumption data we perform numerous robustness checks in both the thai data and in monte carlo simulations and compare our maximum likelihood criterion with results from other metrics and data not used in the estimation a prototypical counterfactual policy evaluation exercise using the estimation results is also featured

incentives for unaware agents the paper introduces the problem of unawareness into principalagent theory and discusses optimal incentive contracts when the agent may be unaware of her action space depending on the agent s default behavior it can be optimal for the principal to propose an incomplete contract that keeps the agent unaware or a complete contract the key tradeoff is that of enlarging the agent s choice set versus adding costly incentive constraints if agents differ in their unawareness optimal contracts show a self reinforcing pattern if there are few unaware agents in the economy optimal contracts promote awareness if unawareness is wide spread optimal contracts shroud the contracting environment thus keeping the agent unaware

informational costs and benefits of creating separately identifiable operating segments abstract we provide an informational theory for how the ownership claims to a firm might be structured when the market price of equity provides valuable contracting information there is a benefit to creating separate ownership claims to each of a firm s divisions however creating this information also generally has adverse incentive effects because it enriches the agent s strategy space we show in a complete contracting setting that under a large class of agencies the firm is strictly better off bundling the ownership claims to divisions that are sufficiently similar and creating separate ownership claims only to divisions that are sufficiently different

risk self protection and ex ante economic value abstract we develop three propositions about the ex ante value of reduced risk if there is a continuous outcome distribution and if self protection influences outcome probability and severity then 1 unobservable utility terms cannot be eliminated from the ex ante value expressions 2 knowledge of the convexity or the nonconvexity of dose response functions is insufficient to sign changes in these expressions and 3 self protection expenditures need not be a lower bound measure of these expressions therefore many restrictions applied in recent empirical work on the economic value of risk changes are not immediately transferable to settings where endogenous risks prevail

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

managing innovation optimal incentive contracts for delegated r d with double moral hazard abstract managing innovation involves double moral hazard because the principal delegates r d to a specialized agent and then makes decisions to apply the resulting invention double moral hazard is significant because innovation by the principal implies that the optimal incentive contract satisfies monotonicity conditions the analysis shows that the optimal incentive contract for delegated r d is an option delegated r d with simultaneous sampling results in shirking but delegated r d with sequential sampling attains the efficient outcome the analysis considers a combined problem with simultaneous and sequential search and gives sufficient conditions under which delegated r d attains the first best the discussion also considers delegated r d with stochastic innovation and with stochastic quality of inventions

carbon taxation when climate affects productivity optimal carbon taxation is evaluated in a model where climate change affects productivity with a numerical us economy model with preexisting taxes the optimal carbon tax is found to exceed marginal social damage by 53 percent and marginal private damage the sum of households marginal willingness to pay by 73 percent the welfare gain from optimal carbon taxation is estimated at 3 58 billion per year when marginal damages are 40 ton employment also increases setting the carbon tax at the pigouvian rate raises welfare by only 3 17 billion the contrasting results in the tax interaction literature are due to the use of marginal private damage when applied to amenity externalities

repeated moral hazard and recursive lagrangeans dynamic agency models with endogenous state variables or many agents are numerically intractable or at least very difficult to solve this problem prevented researchers from analizying an important class of economic problems e g extensions of the basic unemployment insurance framework models of international risk sharing in production economies with private information and optimal executive compensation schemes in this paper i show how to solve these models by building a general theoretical framework for the analysis of repeated moral hazard problems the main contribution is the extension of the recursive

tournament rewards and heavy tails abstract heavy tailed fluctuations are common in many environments such as sales of creative and innovative products or the financial sector we study how the presence of heavy tails in the distribution of shocks affects the optimal allocation of prizes in rank order tournaments a la lazear and rosen 1981 while a winner take all prize schedule maximizes aggregate effort for light tailed shocks prize sharing becomes optimal when shocks acquire heavy tails increasingly so following a skewness order extreme prize sharing rewarding all ranks but the very last is optimal when shocks have a decreasing failure rate such as power laws hence under heavy tailed uncertainty typically associated with strong inequality in the distribution of gains providing incentives and reducing inequality go hand in hand

repeated moral hazard with effort persistence abstract i study a problem of repeated moral hazard where the effect of effort is persistent over time each period s outcome distribution is a function of a geometrically distributed lag of past efforts i show that when the utility of the agent is linear in effort a simple rearrangement of terms in his lifetime utility translates this problem into a related standard repeated moral hazard the solutions for consumption in the two problems are observationally equivalent implying that the main properties of the optimal contract remain unchanged with persistence for illustration i present the computed solution of an example

carbon pricing and energy efficiency improvement why to miss the interaction for developing economies an illustrative cge based application to the pakistan case abstract carbon energy taxes and energy efficiency improvement are studied well in the recent years for their potential adverse impacts on economy especially for lost production and international competitiveness and rebound effects however little attention has been paid to investigate them jointly which can not only prevent fall of energy services cost and thereby rebound effect but reduce the associated macroeconomic costs this study thus employs a 20 sector cge model to explore separately the impacts of carbon tax and its coordinated implementation with energy efficiency improvement on the pakistan economy the country underwent enormous pressure of energy security issues as well as climate change fallouts in the last couple of years and can be regarded as a suitable candidate for energy environmental conservation policies to be considered at a broader context with more concrete efforts the simulation results show that the impact of carbon tax on gdp is negative but resulting reductions in pollutant emissions are relatively high moreover the gdp is expected to grow comparatively positive when analyzed with improvements in energy efficiency with even higher decline in energy consumption demand and so emissions this simultaneous economic and environmental improvement would thus have positive implications regarding sustainable development of the country

preference representation and randomization in principal agent contracts abstract conditions on an agent s preferences that induce a demand for ex ante randomization are derived when the agent has constant absolute risk aversion in wealth but additive separable preferences in wealth and effort optimal contracts often require randomization under additive separability the principal can use randomization to exploit the interaction between incentive considerations and the agent s outside opportunities however when the agent has constant absolute risk aversion in wealth but multiplicative separable preferences participation and incentive considerations separate hence optimal contracts do not exhibit ex ante randomization

subjective performance indicators and discretionary bonus pools key indicators of managerial performance are frequently subjective that is they are difficult to specify and or verify for contracting purposes when a principal must rely on subjective information to create incentives for a group of agents discretionary bonus pools are shown to be optimal mechanisms despite their optimality however discretionary bonus pools entail an additional agency cost relative to the benchmark of optimal contracts based on objective and verifiable information our analysis identifies circumstances under which this additional agency cost is small for example the subjective information signals are precise or the number of agents participating in the bonus pool increases when incentive schemes can be based on both objective and subjective performance indicators the relative weights to be placed on alternative signals are shown to differ from the ones predicted by models with objective signals only we also demonstrate that correlation in measurement errors has a different impact on the structure of optimal incentive schemes when the performance indicators are merely subjective

the economics of labor coercion the majority of labor transactions throughout much of history and a significant fraction of such transactions in many developing countries today are coercive in the sense that force or the threat of force plays a central role in convincing workers to accept employment or its terms we propose a tractable principal agent model of coercion based on the idea that coercive activities by employers or guns affect the participation constraint of workers we show that coercion and effort are complements so that coercion increases effort but coercion always reduces utilitarian social welfare better outside options for workers reduce coercion because of the complementarity between coercion and effort workers with a better outside option exert lower effort in equilibrium and thus are coerced less greater demand for labor increases coercion because it increases equilibrium effort we investigate the interaction between outside options market prices and other economic variables by embedding the coercive principal agent relationship in a general equilibrium setup and studying when and how labor scarcity encourages coercion general market equilibrium interactions working through the price of output lead to a positive relationship between labor scarcity and coercion along the lines of ideas suggested by domar while interactions those working through the outside option lead to a negative relationship similar to ideas advanced in neo malthusian historical analyses of the decline of feudalism in net a decline in available labor increases coercion in general equilibrium if and only if its direct partial equilibrium effect is to increase the price of output by more than it increases outside options our model also suggests that markets in slaves make slaves worse off conditional on enslavement and that coercion is more viable in industries that do not require relationship specific investment by workers

wage formation in norwegian manufacturing an empirical application of a theoretical bargaining model abstract this paper is concerned with the modelling of quarterly wage inflation in norway we develop a bargaining model which we believe is a sound theoretical base for econometric work in this field among other things the model does not lend support to the practice of imposing phillips curve restrictions on the data without further test a parsimonious model is estimated and is made subject to misspecification tests there is no natural rate of unemployment or nairu in our model any constant unemployment rate is compatible with a constant rate of inflation and a real wage growth equal to the productivity growth however the level of the real wage path will be higher the lower is the rate of unemployment

permanent labour and land tenancy contracts in agrarian economies an integrated analysis extending the existing models of land and labour contracts this study attempts to build a general model of long term agrarian contracts the model implies that where tenancy is an available option the fixed wage permanent labour contract will not be chosen if it is chosen under institutional constraints on tenancy contracts resulting resource allocations will be inefficient empirical relevance of the model is tested on data from the philippines

risk bearing and entrepreneurship abstract in the knightian theory of entrepreneurship entrepreneurs provide insurance to workers by paying fixed wages and bear all the risk of production this paper endogenizes entrepreneurial risk by allowing for optimal insurance contracts as well as occupational self selection moral hazard prevents full insurance increases in an agent s wealth then entail increases in risk borne thus even under decreasing risk aversion there are robust instances in which workers are wealthier than entrepreneurs this empirically implausible result suggests that risk based explanations for entrepreneurship are inadequate

optimal monitoring policies in agencies this article considers a principal agent problem in which the principal has access to a costly monitoring technology that can be used to acquire additional information about the agent s actions subsequent to observing the agent s output although randomized monitoring policies are feasible we show that in a variety of contexts optimal monitoring policies are deterministic and lower tailed that is there exists some critical level of output such that further investigation of the agent s actions occurs if and only if output falls below this critical level

existence of optimal mechanisms in principal agent problems we provide general conditions under which principal agent problems with either one or multiple agents admit mechanisms that are optimal for the principal our results cover as special cases pure moral hazard and pure adverse selection we allow multidimensional types actions and signals as well as both financial and non financial rewards our results extend to situations in which there are ex ante or interim restrictions on the mechanism and allow the principal to have decisions in addition to choosing the agent s contract beyond measurability we require no a priori restrictions on the space of mechanisms it is not unusual for randomization to be necessary for optimality and so it should be and is permitted randomization also plays an essential role in our proof we also provide conditions under which some forms of randomization are unnecessary

moral hazard and contractibility in investment decisions abstract this paper uses a principal agent framework to study the incentive effects of contractibility and moral hazard at the first stage of a two stage investment decision we show that when the intermediate signal is publicly observable and contractible there is overinvestment relative to the first best in second stage production purely for incentive reasons however if the intermediate signal cannot be contracted on and in addition the agent and the principal are permitted to act opportunistically the optimal delegated investment decision is to underinvest we discuss the implications of our analysis for the literature on costly monitoring

state contingent rent reduction and tenancy contract choice abstract this study introduces a fixed rent contract with a state contingent rent reduction widely adopted in japan in the early 20th century which a fixed rent was temporary reduced in case of poor harvest the economic implications of this contract are analyzed with a principal agent model it is shown that if the tenant is not too risk averse and or the variability of the yield is not too high then this contract is preferable for the landlord to a fixed rent contract or a share tenancy preliminary tests on the risk sharing implication of a share contract are also provided using the historical data for japan and korea

the effects of risk aversion on production decisions in decentralized organizations this paper presents a principal agent model in which subsequent to contracting the risk averse agent becomes informed about the production process communication of the agent s information is always valuable the optimal contract given this information asymmetry is characterized by less production and a larger risk premium than when information is symmetric leading to an efficiency loss comparative statics show that the loss in expected production increases as the agent becomes more risk averse

justifying the first order approach to principal agent problems it is of interest to know when the incentive compatibility conditio n in principal agent problems can be replaced by the condition that the agent s expected utility be stationary in effort the mirrlees rogerson conditions do not work if the principal can observe more than one observable statistic also the mirrlees rogerson assumption that the distribution function of output is convex in the agent s action is unsatisfactory even in the context of the basi c model it is too restrictive the paper presents a suite of conditio ns that are applicable to the multistatistic case and replaces the objectionable convex distribution function assumption copyright 1988 by the econometric society

a note on economically optimal performance evaluation and control systems the optimality of two tailed investigations the cost variance investigation problem has been modeled in a multiperson setting by baiman and demski bd 1980a 1980b their results include the pareto optimality of one tailed investigations of costs wherein either very large or very small variances but not both should be investigated by the principal one of the sufficient conditions for their result was that the agent have a utility function that belongs to the hyperbolic absolute risk aversion hara class while this class is rich incorporating power exponential and logarithm utility functions different functional forms may imply the optimality of two tailed investigations the purpose of this paper is to derive conditions under which two tailed investigations are optimal within their model assuming two non hara utility functions for the agent in the next section i provide a brief description of the bd 1980b model the hara assumption the optimal investigation rule and the optimal investigation region this provides a basis for comparing results derived when a specific non hara utility function is assumed in section 3 i substitute two non hara agent utility functions for the hara form

moral hazard and marshallian inefficiency evidence from tunisia abstract we formalize the link between optimal cost sharing contracts and the production technology in the presence of moral hazard by appealing to several well known results from duality theory building on intuitions from the interlinkage literature we show that optimal contractual structure is determined by the i substitution possibilities that exist between different observable factor inputs as well as ii between these inputs and unobservable effort we endogenize contractual choice using landlord characteristics as instruments exploiting the fact that in our dataset landlords interact with several tenants and vice versa the approach is applied to an unbalanced plot level panel of cost sharing contracts in a tunisian village using a translog representation of the restricted profit function contractual terms are found to be a significant determinant of input use and therefore lead to marshallian inefficiency while the optimality of the underlying contractual structure is rejected

minimum payments and induced effort in moral hazard problems abstract consider a moral hazard problem in which there is a constraint to pay the agent no less than some amount m this paper studies the effect of changes in m on the effort that the principal chooses to induce from the agent we present sufficient conditions on the informativeness of the signal observed by the principal and on the agent s utility under which when m increases induced effort and hence productivity falls we also study how the cost minimizing contract for any given effort level varies in m we present an efficient algorithm for numerically calculating optimal contracts for given parameters and show that induced effort falls when m is increased in many cases even when our sufficient conditions fail

optimal incentive schemes in bottleneck constrained production environments this paper analyzes the design of incentives and control measures in a manufacturing setting in the environment we consider the output of one operation serves as the input for a second operation where there is a bottleneck inputs must be processed at both workstations to produce the final output thus high production volume at the first operation does not translate into high benefits to the owner unless the output is subsequently processed at the second workstation this is a familiar context in manufacturing management lawrence and buss 1992 critics such as goldratt 1990 argue that in these situations typical cost accounting efficiency measurements motivate the nonbottleneck operation to produce output beyond the available capacity of the bottleneck resource leading to waste and excess work in process inventories however workers at the nonbottleneck operation can be induced not to overproduce if restricting production is desired by the owner we characterize management accounting practices and incentive arrangements that balance output production at nonbottleneck operations with the input demands of the bottleneck facility

optimal contracting of separable production technologies abstract we analyze the class of agency problems with a risk neutral principal and a risk averse agent in which hidden actions and hidden information on the agent s efficiency are jointly present technological assumptions such as monotonicity of likelihood are no longer sufficient for the optimal contract to be monotone in the sharing rule we show that these regularity properties obtain for the rather wide class of production technologies that are separable in the agent s inputs together with ordinal properties such as monotone differences and affiliation of inputs separability yields the monotonicity in efficiency of the agent s actions and indirect utility

a theory of sales quotas with limited liability and rent sharing sales quotas are a fixture of sales compensation plans and are often associated with a significant discrete bonus this article shows that under certain assumptions about salesperson utility and the distribution of sales outcomes the optimal compensation is a discrete bonus for meeting a sales quota the results are similar when the assumption of agent risk neutrality is relaxed the model has implications for many moral hazard problems where the agent has a liability limitation and job specific skill

risk aversion and the choice between risky prospects the preservation of comparative statics results most results in what can be termed the comparative statics of risk aversion are obtained when there is only one source of uncertainty the primary example which originally motivated the definition of risk aversion is that more risk averse people are willing to pay a higher premium for insuring against risk it is known that the results do not generally carry over when there is another source of uncertainty the paper develops conditions under which comparative statics results are robust against the introduction of additional sources of uncertainty

lower salaries and no options on the optimal structure of executive pay we estimate a standard principal agent model with constant relative risk aversion and lognormal stock prices for a sample of 598 us ceos the model is widely used in the compensation literature but it predicts that almost all of the ceos in our sample should hold no stock options instead ceos should have lower base salaries and receive additional shares in their companies for a typical value of relative risk aversion almost half of the ceos in our sample would be required to purchase additional stock in their companies from their private savings the model predicts contracts that would reduce average compensation costs by 20 while providing the same incentives and the same utility to ceos we investigate a number of extensions and modi cations of the standard model but nd none of them to be satisfactory we conclude that the standard principal agent model typically used in the literature cannot rationalize observed contracts one reason may be that executive pay contracts are suboptimal

insecure land rights and share tenancy evidence from madagascar most studies of tenurial insecurity focus on its effects on investment this paper studies the hitherto unexplored relationship between tenurial insecurity and land tenancy contracts based on distinct features of formal law and customary rights in madagascar this paper augments the canonical model of sharecropping by making the strength of the landlord s property right increasing in the amount of risk she bears within the contract using data on landlords subjective perceptions in rural madagascar empirical tests support the hypothesis that insecure property rights drive contract choice but offer little support in favor of the canonical risk sharing hypothesis

endogenous selection and moral hazard in compensation contracts the two major paradigms in the theoretical agency literature are moral hazard i e hidden action and adverse selection i e hidden information prior research typically solves these problems in isolation as opposed to simultaneously incorporating both adverse selection and moral hazard features we formulate two complementary generalized principal agent models that incorporate features observed in real world contracting environments e g agents with power utility and limited liability lognormal stock price distributions and stock options as mathematical programs with equilibrium constraints mpec we use state of the art numerical algorithms to solve the resulting models we find that many of the standard results no longer obtain when wealth effects are present we also develop a new measure of incentives calculated as the change in the agent s certainty equivalent under the optimal contract for a change in action evaluated at the optimal action this measure facilitates interpretation of the resulting contracts and allows us to compare contracts across different contracting environments

what can we learn from simulating a standard agency model abstract for typical parametrizations of the standard bell journal of economics 10 1979 74 agency model this paper demonstrates that the set of first order conditions characterizing the optimal contract can be reduced to a single equation a problem of investment financing under moral hazard is used to illustrate the reduced form equation s usefulness in quantitative applications when the agent has cara preferences over consumption it is shown that any exogenous limit on the penalties for low output is always binding

auditing and competitive bidding in the public sector abstract this paper investigates the impact of a ministry s budget size on the choice between auditing a niskanen bureau and employing competitive bidding in the provision of a publicly funded good the ministry s marginal expected payoff increases fastest with budget size for auctioning as opposed to auditing however the ministry is shown to switch from a purely public provision to a competitive provision as the budget size increases even if expected fixed costs favor the audit the study contributes to the literature by extending the niskanen framework and by endogenizing the institutional arrangements for the provision of public sector goods

linearity with project selection and controllable diffusion rate in continuous time principal agent problems i extend holmstrom and milgrom s model by allowing the agent to control privately or publicly the diffusion rate process and show that the optimal contract is still linear i discuss the conditions under which conflicts over the choice of diffusion rate do and do not arise as an application i examine project selection problems of a firm conflicts between the manager and investors arise because giving the manager too much incentive to work to increase the profit from ongoing operations can induce him to be too conservative in project selection possibly resulting in optimal contracts with low sensitivities

performance standards and optimal incentives abstract this paper analyzes incentive design when agents effort influences an uncertain output governed by a random process with semi heavy tails we find that the second best incentive contract pays an output increasing but bounded fee with a shape resembling performance standard contracts that pay a fixed salary plus a capped bonus in this contract the pay performance sensitivity around the standard increases decreases with the frequency with which performance is measured and with the kurtosis volatility parameter of the performance probability distribution we also find that the optimal maximum bonus increases with volatility but decreases with the kurtosis parameter of the performance distribution

a rationalization of bonuses penalties and kinked payment functions within an agency model abstract the optimal payment schedule of the simplest principal agent problem can be continuous smooth or kinked or semicontinuous depending on the specifications of objective functions of the principal and or of the agent using the nonsmooth mathematical analysis this article determines a mapping from classes of objective functions into classes of optimal payment functions examples provide illustrations

on the validity of the first order approach with moral hazard and hidden assets with moral hazard and anonymous asset trade first order conditions need not characterize effort and portfolio choices the standard procedure for establishing validity of the first order approach in economies with one hidden asset is not fruitful when multiple assets are hidden

introducing convexity into optimal compensation contracts abstract we study when it is appropriate to add a convex component such as stock options to an optimal managerial compensation contract we show that convexity is introduced when managers have moderate levels of relative risk aversion and decreasing absolute risk aversion in addition we study how convexity is affected as the distribution of outcomes becomes more skewed toward low outcomes here we show that while convexity increases when skewness is increased without regard to the effect on mean stock price the opposite effect results when increases in skewness leave the mean stock price unchanged

quantifying the social welfare loss in moral hazard models abstract the main aim of this paper is to measure the social welfare loss for a continuous moral hazard model when a set of minimal assumptions are fulfilled by using a new approach we are able to reproduce the results of balmaceda balseiro correa and stier moses 2010 pertaining to the social welfare loss for discrete and continuous models respectively previous studies rely on the validity of the first order approach at the expense of strong assumptions in particular the convexity of the distribution function condition while we do not make such a restrictive assumption in our developments in addition we obtain new bounds for the social welfare loss that are both tight and easy to compute

moral hazard with bounded payments we study the moral hazard problem with general constraints on how little or much the agent can be paid as a function of output we provide a characterization and existence result using only very simple methods in the dual problem of minimizing costs for a given effort level a constraint that harms the principal will always result in a contract that pays according to the constraint on some range of outcomes for the case of a simple fixed minimum feasible payment the resultant contract will be option like we show how the strike price and intensity of incentives once the strike price is exceeded vary in the minimum payment and the outside option of the agent when the principal can also choose the effort to induce then even if the constraint harms the principal he may optimally choose a contract that never pays the minimum or maximum we show that this can only occur if the problem without the payment constraints fails a form of concavity

hidden insurance in a moral hazard economy we analyze the general equilibrium of an economy in which a competitive industry produces nonexclusive insurance services the equilibrium is inefficient because insurance contracts cannot control moral hazard and welfare can be improved by policies that reduce insurance by increasing its price above marginal cost we discuss how insurance production costs that exceed expected claim payments interact with moral hazard in determining the equilibrium s inefficiency and show that these costs can make insurance premia so actuarially unfair as to validate the standard first order conditions we exploit in our analysis

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

moral hazard externalities and compensation for crop damages from wildlife abstract a principal multiple agent model is used to examine wildlife damage abatement and compensation programs in a setting in which farmers suffer damages and hunters use the wildlife for recreational purposes in addition to externalities inherent in abatement abatement compensation policy confronts the issue of moral hazard by representing the principal as a wildlife management authority who acts on behalf of hunters we investigate contracts in which transfers of more or less severe hunting regulations a public good that aids in dispersing wildlife and monetary payments from hunting license fees can be used to overcome moral hazard

on the first order approach in principal agent models with hidden borrowing and lending we provide sufficient conditions for the validity of the first order approach for two period dynamic moral hazard problems where the agent can save and borrow secretly the first order approach is valid if the following conditions hold i the agent has non increasing absolute risk aversion utility niara ii the output technology has monotone likelihood ratios mlr and iii the distribution function of output is log convex in effort lcdf moreover under these three conditions the optimal contract is monotone in output we also investigate a few possibilities of relaxing these requirements

agricultural markets as relative performance evaluation relative performance schemes such as tournaments are commonly used in markets for a variety of livestock and processing commodities while explicit versions of these schemes are rarely used in markets for fresh fruits and vegetables and specialty grains we show how contracts for these latter commodities do in fact provide relative performance incentives albeit indirectly via a payment mechanism that depends on market prices in such contracts compensation is often an increasing function of revenue this implements a relative performance scheme by making each grower s payment an increasing function of his own output but a decreasing function of other s output in an important 1982 article holmstr om models the problem facing a group of agents each of whom produces an observable quantity of some good by taking an unobservable action a rather robust conclusion from this line of inquiry is that when the production of one agent is not independent of the production of another then the compensation awarded to the first agent should depend not only on his own production but also on the output of others in particular if agents production is positively correlated because of some common shock for example then an agent s compensation should be larger when other agents output is smaller a phenomenon which holmstr om terms relative performance evaluation relative performance evaluation ought to be particularly important for agricultural producers and the various intermediaries who purchase their output these producers face considerable common risk from aggregate production shocks and so one would expect that relative performance evaluation could improve efficiency in fact certain types of agricultural intermediaries do use explicit relative performance schemes as predicted by

executive compensation a modern primer this article studies traditional and modern theories of executive compensation bringing them together under a simple unifying framework accessible to the general interest reader we analyze assignment models of the level of pay and static and dynamic moral hazard models of incentives and compare their predictions to empirical findings we make two broad points first traditional theories find it difficult to explain the data suggesting that compensation results from rent extraction by ceos however more modern shareholder value theories that arguably better capture the ceo setting do deliver predictions consistent with observed practices suggesting that these practices need not be inefficient second seemingly innocuous features of the modeling setup often made for tractability or convenience can lead to significant differences in the model s implications and conclusions on the efficiency of observed practices we close by highlighting apparent inefficiencies in executive compensation and additional directions for future research