Incentive contracts in two-sided moral hazards with multiple agents

Nabil I. Al-Najjar*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

The paper studies a contracting problem in which a principal enters in two-sided moral hazards withNindependent agents. There are no technological or informational linkages among theNagency problems. Despite this independence, optimal incentive schemes essentially eliminate the principal's incentive problem when team size is large enough. Reputation-like effects appear in a static setting through an improved aggregation of information about the actions of the principal. One implication of this result is that it is generally suboptimal to require an agent's compensation to depend only on his own outcome. Another implication is the existence of purely informational economies of scale to increasing team size. Thus, the concentration of otherwise unrelated transactions in a single "firm" creates wealth through a more efficient use of information about the Principal's actions. The paper also shows that extremely simple statistical contracts are approximately optimal in large teams. The outcome of such contracts is observationally indistinguishable from standard principal-agent contracts. This provides a theoretical justification for using standard principal-agent contracts in environments that involve two-sided hazard in a fundamental way.Journal of Economic LiteratureClassification Numbers: D21, D23.

Original languageEnglish (US)
Pages (from-to)174-195
Number of pages22
JournalJournal of Economic Theory
Volume74
Issue number1
DOIs
StatePublished - May 1997

ASJC Scopus subject areas

  • Economics and Econometrics

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