Ex ante Randomization in Agency Models

We consider how a principal can use randomized strategies in designing optimal contracts in agency settings. We distinguish between ex post randomization (over fee schedules following act selection by the agent) and ex ante randomization (over fee schedules before act selection). We show that ex ant...

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Bibliographic Details
Published in:The Rand journal of economics 1984-07, Vol.15 (2), p.290-301
Main Authors: Fellingham, John C., Kwon, Young K., Newman, D. Paul
Format: Article
Language:English
Subjects:
Agencies
Agents
Business orders
Concavity
Contracts
Economic models
Economic theory
Expected utility
Fees
Financial risk
Musical agency
Principals
Random allocation
Risk aversion
Short Articles
Utility functions
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Summary:We consider how a principal can use randomized strategies in designing optimal contracts in agency settings. We distinguish between ex post randomization (over fee schedules following act selection by the agent) and ex ante randomization (over fee schedules before act selection). We show that ex ante randomization may be efficient in both full information and private information settings under certain assumptions regarding preferences and the production technology. It is particularly significant that additive separability and concavity of the agent's utility function as well as concavity of the production function do not rule out efficient ex ante randomized contracts in private information settings, although, as is known, they rule out ex post randomization.
ISSN:0741-6261
1756-2171
DOI:10.2307/2555682