Tian, Guoqiang and Meng, Dawen (2011): Multi-task Incentive Contract and Performance Measurement with Multidimensional Types.
Download (340kB) | Preview
This paper provides a new explanation for the dominance of the low-powered incentive contract over the high-powered incentive contract using a mixed model of moral hazard and adverse selection. We first show that the power of incentives in the second-best contract is lower than that in the first-best contract in the presence of either unobservable risk aversion or cost. We then consider the case that both risk aversion and cost of the agent are unob- servable to the principal. We solve this multidimensional mechanism design problem under two assumptions with regard to the structures of performance measurement system and wage contract. It is shown that if the deterministic and stochastic components of different per- formance measures vary proportionally, the principal is inclined to provide a low-powered incentive contract. Moreover, it is shown that if the base wage depends only on a quadratic function rather than the direction of the performance wage vector, no incentive is provided for most of the performance measures in an orthogonal performance measurement system.
|Item Type:||MPRA Paper|
|Original Title:||Multi-task Incentive Contract and Performance Measurement with Multidimensional Types|
|Keywords:||multi-task incentive model, multidimensional mechanism design, low-powered incentive, missing incentive|
|Subjects:||D - Microeconomics > D6 - Welfare Economics > D62 - Externalities
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design
D - Microeconomics > D4 - Market Structure, Pricing, and Design > D42 - Monopoly
|Depositing User:||Guoqiang Tian|
|Date Deposited:||12. Sep 2012 12:33|
|Last Modified:||10. Oct 2015 18:04|
 Armstrong, M. (1996) "Multiproduct Nonlinear Pricing", Econometrica, 64: 51-75
 Baker, G. 1992. "Incentive Contracts and Performance Measurement", Journal of Polit- ical Economy 100, 598-614
 Baker, G.P. (2002). "Distortion and Risk in Optimal Incentive Contracts", Journal of Human Recources, 37, 728-751.
 Basov, S., (2001) "Hamiltonian Approach to Multi-dimensional Screening", Journal of Mathematical Economics, 36: 77-94.
 Feltham G. A., and J. Xie. "Performance Measure Congruity and Diversity in Multi-Task Principal-Agent Relations", The Accounting Review, 1994, 69: 429-453
 Frant, H. (1996) "High-Powered and Low-Powered Incentives in the Public Sector", Jour- nal of Public Administration Research and Theory 6:365-82.
 Guesnerie, R. (1981): "On Taxation and Incentives: Further Reflections on the Limits of Redistribution." Discussion Paper No.89, Sonderforschungsbereich 21, University of Bonn.
 Green, J., and Stokey, N. (1983), "A Comparison of Tournaments and Contracts", Jour- nal of Political Economy 91: 349-364.
 Hurwicz, L., 1972, On Informationally Decentralized Systems, in: Radner, R. and C. B. McGuire, eds., Decision and Organization, Volume in Honor of J. Marschak (North- Holland) 297-336.
 Hurwicz L (1979), "On the Dimension Requirements of Informationally Decentralized Pareto-satisfactory Processes", In: Arrow K, Hurwicz L (eds) Studies in Resource Allo- cation Processes, Cambridge University Press
 Hurwicz L (1986), "On Informational Decentralization and E±ciency in Resource Allo- cation Mechanism", In: Reiter, S. (ed) , Studies in Mathematical Economics, Mathemat- ical Association of America
 Hammond, P. (1979), "Straightforward Individual Incentive Compatibility in Large Economies", Review of Economic Studies, 46:263-282
 Holmstrom, B. and P. Milgrom (1991), "Multitask Principal-Agent Analyses", Journal of Law, Economics, and Organization 7: 24-52
 Lazear, E. and Rosen, S. 1981, "Rank-Order Tournaments as Optimum Labor Con- tracts", Journal of Political Economy, 89: 841-864.
 Mount, K. and Reiter,S. (1974) "Informational Size of Message Spaces", Journal of Economic Theory 8:161-191 24
 Nalebuff, B., and Stiglitz, J. (1983), "Prices and Incentives: Towards a General Theory of Compensation and Competition", Bell Journal of Economics 14: 21-43.
 Osana H (1978), "On the Informational Size of Message Spaces for Resource Allocation Process", Journal of Economic Theory, 17:66-78
 Rochet, J.-C. (1985), "The Taxation Principle and Multi-time Hamilton-Jacobi Equa- tions", Journal of Mathematical Economics, 14, 113-128
 Rochet, J.-C., and P. Chone (1998), "Ironing, Sweeping, and Multidimensional Screen- ing", Econometrica 66: 783-826.
 Rochet, J.-C. (1987), "A Necessary and Su±cient Condition for Rationalizability in a Quasi-linear Context", Journal of Mathematical Economics 16: 190-200.
 Tian, G (1994), "On Informational E±ciency and Incentive Aspects of Generalized Ratio Equilibria", Journal of Mathematical Economics, 23:323-337
 Tian, G (2004), "A Unique Informationally Effcient Allocation Mechanism in Economies with Consumption Externalities," International Economic Review, 45:79-111
 Tian, G (2006), "The Unique Informational Effciency of the Competitive Mechanism in Economies with Production," Social Choice and Welfare, 26, 155-182.
 Thiele, V (2010) "Task-Specific Abilities in Multi-Task Principal-Agent Relationships", Labour Economics, 17(4), 690-698.
 Walker, M (1977), "On the Informational Size of Message Spaces", Journal of Economic Theory, 15:366-375
 Williamson, O. (1985) "The Economic Institutions of Capitalism: Firms, Markets, Re- lational Contracting", New York: Free Press. 2