Creating countervailing incentives through the choice of instruments

We analyze the relative efficiency of output and input incentive schemes in an agency model under adverse selection. Depending on the marginal rate of substitution between effort and productivity, two cases of note may appear. In the first one, both incentive schemes imply the same ranking of agents...

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Bibliographic Details
Published in:Journal of public economics 2000-05, Vol.76 (2), p.181-202
Main Authors: Bontems, Philippe, Bourgeon, Jean-Marc
Format: Article
Language:English
Subjects:
Adverse selection
Agency theory
Asymmetric information
Contract theory
Contracts
Economic incentives
Economic models
Incentives
Input output
Output and input monitoring
Output rate
Principal-agent theory
Public economics
Studies
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Summary:We analyze the relative efficiency of output and input incentive schemes in an agency model under adverse selection. Depending on the marginal rate of substitution between effort and productivity, two cases of note may appear. In the first one, both incentive schemes imply the same ranking of agents regarding the productivity parameter. In that case, one instrument always dominates the other one, whatever the agent’s type. In the second case, the two schemes produce reverse rankings and the principal is always better off using a type-dependent mixed strategy over the two incentive schemes. If there is no restriction on mixed strategies, the principal is able to implement the first best. If the principal must use pure strategies, she is still better off by offering contracts with type-dependent monitoring instrument: allowing the agent to choose the instrument enhances the principal welfare.
ISSN:0047-2727
1879-2316
DOI:10.1016/S0047-2727(99)00042-0