optimal incentive schemes with many agents the grossman hart principal agent model of moral hazard is extended to the multiple agent case to explore the use of relative performance in optimal incentive contracting under the assumption that the principal chooses incentive schemes to implement agent actions as nash equilibria necessary and sufficient conditions are derived for the optimality of independent contracts of rank order tournaments and for attainability of the first best in this context the relation of the principal s welfare to the correlation between the underlying randomness in outputs of different agents is also investigated finally some problems with the nash equilibrium implementation assumption are discussed in this paper we extend the grossman hart analysis of the principal agent problem to a multiple agent setting in this version of the problem a risk neutral principal is assumed to observe the output or a performance index for each risk averse agent the output of any agent depends on a privately observable action chosen by the agent and an exogenous random variable the realization of which is not observed either by the principal or by the agent before choosing its action we especially focus attention on the role of relative performance evaluation in optimal incentive contracts and the way this depends on properties of the underlying production technology and the joint distribution of the random variables affecting the outputs of different agents in section 2 of the paper we consider the principal s problem of finding an optimal incentive scheme and an action tuple for agents subject to the constraint that the latter be implemented as a nash equilibrium between agents by the chosen incentive scheme where agents must attain at least their reservation utilities a characterization of optimal incentive schemes is derived analogous to the grossman hart characterization for the single agent problem this characterization is then utilized to find sufficient and generically necessary conditions for a optimal contracts for any agent to be independent of the performance of other agents and b optimality of rank order tournaments where payments depend solely on ordinal comparisons of output across agents we then describe a necessary and sufficient condition for the principal to extract maximum advantage from relative performance clauses i e achieve the first best level of expected utility in the multiagent situation an implication of this result is that under fairly weak conditions perfect correlation in the underlying production uncertainties for different agents enables the principal to attain the first best if and only if sufficiently heavy penalties can be inflicted on agents we then enquire what happens in intermediate cases of non perfect correlation it turns out that while in general the principal s welfare is a continuous function of the correlation coefficient it is not always nondecreasing in the latter because the correlation coefficient is not a general measure of association between two random variables but rather a measure of linear association between them

stopping agents from cheating abstract when a principal hires two or more agents to work in a correlated environment each agent s reward will depend on the other s performance unfortunately with just the usual optimal incentive constrained contracts being offered the agents strictly prefer to play equilibrium strategies other than those desired by the principal they cheat however the principal can use a more subtle contractual mechanism to stop them from cheating at no extra cost this mechanism uses one agent to police the other and exploits certain properties of the optimal contracts

smart grid investments regulation and organization worldwide but in particular in north america and europe the grid infrastructure managers are facing demands for reinvestments in new assets with higher on grid and off grid functionality in order to promote energy efficiency and low carbon conversion of the energy sector to meet societal policy objectives in terms of carbon dioxide emissions both the composition of the generators in favor of distributed energy resources der and the load promoting integration with downstream energy useage will change in this paper we chararcterize some of the effects of new asset investments policy on the network tasks assets and costs and contrast this with the assumptions implicit or explicit in current economic network regulation the resulting challenge is identified as the change in the direction of higher asymmetry of information and higher capital intensity combined with ambiguities in terms of task separation to provide guidance we present a model of investment provision under regulation between a distribution system operator dso and a potential investor generation the results from the model confirm the hypothesis that network regulation should find a focal point should integrate externalities in the performance assessment and should avoid wide delegation of contracting billing for smart grid investments

risk allocation and the costs and benefits of public private partnerships we study the agency costs of delegated public service provision focusing on the link between organizational forms and uncertainty at project implementation we consider a dynamic multitask moral hazard environment where the mapping between efiort and performance is ex ante uncertain but new information may come along during operations our analysis points out at the e ciency gains that bundling planning and implementation as under public private partnerships can bring in terms of better project design and lower operational costs bundling also results in increasingly better performance as uncertainty is reduced by growing experience in the sector bundling should instead be viewed with caution when the private sector seeks to radically innovate on public service provision or to introduce new services but lacks the knowledge and expertise to anticipate the impact of the innovative design procedure technology on the cost of operations the compounding of asymmetric information ex post plus moral hazard and renegotiation may generate diseconomies of scope in agency costs which for high operational risk can make unbundling optimal in this context the use of private flnance can help re establishing the beneflt of bundling only if lenders have su cient expertise to help assessing project risks

moral hazard with several agents abstract we consider a situation in which a principal hires two agents whose cooperation is technically profitable and study three models that incorporate different assumptions about the agents cooperative behavior we find a close relationship between the agents commitment capacity and the characteristics of the optimal contract a greater capacity to cooperate leads to more efficient outcomes we also show that unless agents form a team the efficient level of mutual help is not achieved in equilibrium

cooperation in ongoing organizations this paper argues that overlapping games can provide a natural theory of long lived organizations it shows that participation in organizations of infinite duration changes the incentives of agents with finite lives and will induce more cooperation than a static model would predict after developing the general theory we apply it to the description of career paths in organizations and show that it can be optimal to give the youngest workers the most arduous tasks

toward an economic model of the japanese firm i owe a great deal to professor moses abramovitz who suggested that i write this article i appreciate his constant encouragement and guidance which aided me throughout its preparation i am also indebted to three anonymous referees of the journal and to professors ryutaro komiya and michael riordan for their critical comments and helpful suggestions needless to say i am solely responsible for the views expressed in this paper

bundling decisions in procurement auctions with sequential tasks abstract this paper investigates the principal s bundling decision during a procurement auction for a project consisting of two sequential tasks in which task externality exists and information arrives sequentially we show that although increasing the number of bidders in the market for the second task always tilts the principal s choice toward unbundling increasing the number of consortiums that can perform both tasks tilts the principal s preference toward bundling if the externality is negative

unique implementation of incentive contracts with many agents in this paper we consider the problem of implementation when a principal hires many agents and is not able to monitor their actions we distinguish two cases i when actions are mutually observable among agents ii when actions are not observable at all in i there is a mechanism in which the first best arises as a unique perfect equilibrium in ii we show by two examples that typically there are multiple equilibria if the principal merely offers a set of optimal sharing rules however we prove that the principal can use these optimal sharing rules as a starting point and construct a multi stage mechanism that has a unique second best perfect bayesian equilibrium

communication networks externalities and the price of information information goods or information for short play an essential role in modern economies we consider a trading framework where information has some idiosyncratic value for each consumer exerts externalities and can be freely replicated and transmitted through links in a communication network prices paid for information are determined via the asymmetric nash bargaining solution with endogenous disagreement points this decentralized approach leads to unique prices and payoffs in any exogenous network we use these payoffs to find connection structures that emerge under different externality regimes in pre trade network formation stage an application to citation graphs results in eigenvector like measures of intellectual influence

to build or not to build normative and positive theories of public private partnerships abstract this paper analyzes whether the two tasks of building infrastructures which are socially useful in providing public services and managing these assets should be bundled or not when performance contracts can be written both tasks should be performed altogether by the same firm if a better design of the infrastructure helps also to save on operating costs otherwise tasks should be kept apart and undertaken by different units in incomplete contracting environments we isolate conditions under which either the traditional form of public provision of services or the more fashionable public private partnership emerges optimally the latter dominates when there is a positive externality and the private benefits from owning assets are small enough finally we take a political economy perspective and study how incentive schemes are modified under the threat of capture of the decision makers much of the gains from bundling may be lost in this case

migration and the evolution of conventions we study an evolutionary model where agents are locally matched to play a symmetric coordination game opportunities to adjust strategy and location arrive asynchronously and infrequently and cannot be coordinated our results on the short run co existence of different conventions and long run efficiency depend upon a condition on off equilibrium payoffs introduced by aumann in a pure coordination game efficient and inefficient conventions may co exist at different locations in the short run and inefficient conventions are stochastically stable in a stag hunt game there is neither short run coexistence nor long run inefficiency

centralized and decentralized contracts in a moral hazard environment we study the optimal allocation of the contracting capacity in a moral hazard environment centralizing is superior when the principal is able to establish all the contracts with the agents simultaneously and she is able to monitor side contracting between the agents otherwise decentralizing can be a superior strategy we apply our results to a firm s decision on which outlets to franchise they suggest that franchising is more likely to occur the further the store is from headquarters the more isolated it is and in those activities where the risk is low this conclusion is consistent with empirical studies

constrained interactions and social coordination we consider a co evolutionary model of social coordination and network formation where agents may decide on an action in a 2x2 coordination game and on whom to establish costly links to we find that a payoff domination convention is selected for a wider parameter range when agents may only support a limited number of links as compared to a scenario where agents are not constrained in their linking choice the main reason behind this result is that whenever there is a small cluster of agents playing the efficient strategy other players want to link up to those layers and choose the efficient action

research joint ventures vs cross licensing agreements an agency approach abstract in this paper two broad categories of organizing a cooperative r d project are compared a research joint venture rjv and a cross licensing agreement cla in a non deterministic r d setting including asymmetric information we show that an rjv is more efficient in providing incentives it allows to capture existing synergies and facilitates the dissemination of the partners know how which is socially desirable however contrary to a cla an rjv faces the risk of opportunistic behavior by the partners regarding the provision of their know how to the venture which could lead a cla to perform more efficiently and in some cases this organization turns out to be superior

on information sharing and incentives in r d i investigate the issue of endogenous spillover of r d information across firms through information exchange between their employees although the firms typically cannot observe and restrict communication between their employees in a direct way they can regulate information flows through the incentive schemes offered to the employees the article focuses on two issues characterization of the optimal incentive schemes and the link between the nature of the firms interaction in the product market and the intensity of information exchange between the employees copyright 2001 by the rand corporation

a possibilistic mean semivariance entropy model for multi period portfolio selection with transaction costs abstract this paper deals with a multi period portfolio selection problem with fuzzy returns a possibilistic mean semivariance entropy model for multi period portfolio selection is presented by taking into account four criteria viz return risk transaction cost and diversification degree of portfolio in the proposed model the return level is quantified by the possibilistic mean value of return the risk level is characterized by the lower possibilistic semivariance of return and the diversification degree of portfolio is measured by the originally presented possibilistic entropy furthermore a hybrid intelligent algorithm is designed to obtain the optimal portfolio strategy finally the comparison analysis between the possibilistic entropy model and the proportion entropy model is provided by two numerical examples to illustrate the efficiency of the proposed approaches and the designed algorithm

optimal incentive contracts with multiple agents abstract a setting in which a single principal contracts with two agents who possess perfect private information about their own productivity is considered with correlated productivities each agent s private information also provides a signal about the other agent s productivity in contrast to the setting in which there is only one agent it is shown that such private information may be of no value to the agents it is only if the agents are risk averse that their private information may allow them to command rents moreover when the agents are constrained only to reveal their private information truthfully as a nash equilibrium the pareto optimal incentive scheme may induce the agents to adopt strategies other than truth telling this leads to the consideration of truth telling equilibria that are not pareto dominated in the subgame played by the agents among all such equilibria the one preferred by the principal restricts one agent to tell the truth as a dominant strategy and the other as a nash response to truth

moral hazard and cooperation abstract we consider a situation in which a principal hires two agents whose cooperation is profitable from a technical point of view the characteristics of the optimal contract are strongly dependent on the agents commitment capacity that allows them to reach more efficient outcomes

an evolutionary approach to pre play communication we add a round of pre play communication to a finite two player game played by a population of players pre play communication is cheap talk in the sense that it does not directly enter the payoffs the paper characterizes the set of strategies that are stable with respect to a stochastic dynamic adaptive process periodically players have an opportunity to change their strategy with a strategy that is more successful against the current population any strategy that weakly improves upon the current poorest performer in the population enters with positive probability when there is no conflict of interest between the players only the efficient outcome is stable with respect to these dynamics for general games the set of stable payoffs is typically large every efficient payoff recurs infinitely often

decentralization and collusion abstract we consider a model where agents work in sequence on a project share information not available to the principal and can collude due to limited liability the coase theorem does not apply the distribution of surplus among the agents is therefore an important control variable for the principal which gives us a theory of how to delegate in an organization subject to moral hazard the optimal distribution of surplus can always be achieved by delegating in the right way decentralization without using message games journal of economic literature classification numbers d23 d82 l14 l22

optimality of myopic strategies for multi stock discrete time market with management costs the paper studies multi stock discrete time market models with serial correlations and with some management costs we found a market structure that ensures that the optimal strategy is myopic for the case of either power or log utility function

back testing the performance of an actively managed option portfolio at the swedish stock market 1990 1999 we build an investment model based on stochastic programming in the model we buy at the ask price and sell at the bid price we apply the model to a case where we can invest in a swedish stock index call options on the index and the risk free asset by reoptimizing the portfolio on a daily basis over a ten year period it is shown that options can be used to create a portfolio that outperforms the index with ex post analysis it is furthermore shown that we can create a portfolio that dominates the index in terms of mean and variance i e at given level of risk we could have achieved a higher return using options

national vs european incentive policies bargaining information and coordination abstract we build a hierarchical model of contractual relationships under moral hazard to address issues about subsidiarity i e optimal de centralization of incentive industrial policies at the national level or at the european community level incentive policy is viewed as an incentive contract for producers who take unobservable decisions that have spillover effects across member states a community agency designs contracts for producers and contractual compensatory transfers between states on the basis of its observations then national regulators and their home producers negotiate according to a generalized nash bargaining a national contract that complements the community contracts given that national regulators will have access to more observations on the producers activities in this setting we show that full centralization is never optimal we give sufficient conditions for complete decentralization to be optimal and when both policies are present we characterize how they interact to provide incentives to producers

on the use of mean variance and quadratic approximations in implementing dynamic investment strategies a comparison of returns and investment policies this paper compares two approximation schemes for calculating the optimal portfolios in the discrete time dynamic investment model specifically the mean variance mv and the quadratic approximations to the exact power function method future returns are estimated via the empirical probability assessment approach the results show that i with quarterly revision the mv model approximates the dynamic model very well ii with annual revision there are often sharp differences between the power function model and the mv approximation and iii these differences become even larger when the quadratic approximation is used

decentralization and the coordination problem abstract this paper addresses the relationship between the degree of decentralization in a population and the probability of coordinating on an efficient outcome rather than the risk dominant outcome in a coordination game the model here extends the literature on evolutionary games by supposing that players interact in groups but that occasionally they may change groups the main innovation is the group changing assumption which allows players to vote with their feet in contrast to most of the recent literature e g kandori et al 1993 in which the risk dominant equilibrium is selected in the long run the model here predicts convergence to the efficient equilibrium if interaction is decentralized enough furthermore it is shown how the model can be applied to the problem of product standardization

a note on the optimal structure of production abstract we analyze the advantages of centralization and decentralization in industries in which production takes place in several stages and the costs are privately observed by the agents in charge of production we demonstrate that informational diseconomies arise when uncorrelated information is concentrated in the hands of a single agent these diseconomies arise when the stages of production are different activities with different cost supports journal of economic literature classification numbers d82 l22 l51

communication coordination and nash equilibrium i note a methodological problem in studying the role of pre play communication in ensuring equilibrium to deal with this problem i define a solution concept for the extended game in which talk is followed by play that is intermediate between nash equilibrium and rationalizability in some games our solution concept implies a nash outcome while in others it does not

optimal incentives for teams much of the existing theory of incentives describes a static relationship that lasts for just one transaction this static assumption is not only unrealistic but the resulting predictions appear to be at odds with many work organizations the current paper introduces possible long term interaction among agents and studies how the design of explicit incentives and work organizations can exploit and interact with the implicit incentives generated by the repeated interaction of the agents the optimal incentive scheme is shown to display observed features of the increasingly popular teams such as the use of low powered group incentives