Download or read book Screening Versus Sorting in a Principal Agent Model with Moral Hazard and Adverse Selection written by Rajiv D. Banker and published by . This book was released on 2014 with total page 58 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a principal-agent model of moral hazard and adverse selection that introduces the notion of screening, which is distinct from sorting; and distinguishes between ability that is privately known by the agent versus general ability that is observable by the principal and market. Sorting is the traditional process by which the adverse selection problem is resolved. Screening is the process we propose by which agents that are deemed to be unsuitable are rejected. Used in conjunction with sorting, we consider ex-ante screening on the basis of the measure of general ability; and ex-post screening on the basis of the private measure of ability. We find that the principal may favor an agent with high or low general ability, but always prefers an agent with superior private ability. We derive the properties of the ex-ante and ex-post screening rules as they relate to the characteristics of the principal-agent relationship. Surprisingly, a positive relationship between the private and general measures of ability tends to imply that general ability has a negative effect on the incentives and compensation of the agent, as well as the expected outcome and profit of the firm. Finally, we discuss the econometric methods by which empirical studies of executive compensation should be adjusted to take into account the fact that CEOs were selected for their positions.
Download or read book Screening Risk Averse Agents Under Moral Hazard written by Bruno Jullien and published by . This book was released on 2001 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Relative Weights on Performance Measures in a Principal Agent Model with Moral Hazard and Adverse Selection written by Rajiv D. Banker and published by . This book was released on 2014 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the role of multiple measures of performance in a principal-agent model incorporating both moral hazard and adverse selection. The outcome of interest to the principal depends stochastically on the agent's unobservable ability and effort, while the principal implements a contract contingent on two noisy measures of the outcome. There are three main findings. First, the weights assigned the performance measures are reduced in the presence of adverse selection because the informational rent paid to the agent lowers the return to the principal of hiring the agent, but it does not affect how informative one signal is relative to another. Second, the weights assigned the signals are decreasing in the sensitivity of performance to ability. Third, a signal is assigned more weight if and only if it is more precise and sensitive to the agent's effort; thus, the Banker and Datar (1989) result is robust to the introduction of adverse selection. An empirical test of the model is provided in the context of the CEO pay-for-performance sensitivity and the investment opportunities set (IOS) of the firms they manage. If high IOS firms are more ability-intensive, the model predicts the weights on the performance measures are decreasing in IOS. We examine a sample of 12,221 firm-year observations for 1,411 firms spanning the period 1992-2006 obtained from ExecuComp, CRSP, and Compustat. In agreement with the model, we find that CEO compensation is less sensitive to accounting and stock returns in high IOS firms.
Download or read book Design of Incentive Systems written by Dennis D. Fehrenbacher and published by Springer Science & Business Media. This book was released on 2013-05-28 with total page 265 pages. Available in PDF, EPUB and Kindle. Book excerpt: Monetary incentives, as a driving force for human behavior, are the main theme of this book. The primary goals underlying the application of monetary incentive systems in companies are motivating employees to strive for superior productivity in line with the interests of employers, and hiring adequately skilled employees. The first goal refers to incentive effects, the latter to sorting effects. This book introduces important theories and concepts concerning behavior under influence of monetary incentives; it reviews existing economic frameworks and identifies specific contingency variables. Based on an integrative framework of elements influencing incentive and sorting effects, a laboratory experiment is presented including detailed methodological discussion on experimentation and data analysis as well as an extensive presentation of findings and discussion of implications.
Download or read book Multitasking Multidimensional Screening and Moral Hazard with Risk Neutral Agents written by Svetlana Danilkina and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we consider a model where a risk-neutral principal devises a contract for a risk neutral agent who can exert effort along different dimensions. On the top of that the agent possesses multidimensional private information about her cost of effort. We show that as long as effort is exerted along different dimensions that exceed in number the available performance measures, hidden action prevents implementing the second best solution, obtained under pure adverse selection situation, even if both parties are risk neutral and private information of the agent is not correlated with the production technology. Therefore, hidden action leads to additional welfare loss. The result implies that it can be more efficient to compensate employees on the basis of a variety of performance measures rather than base their compensation on a "bottom-line" measure (e.g. their contribution to the company's profits).
Download or read book Do Tournaments Solve the Adverse Selection Problem written by Theofanis Tsoulouhas and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper provides a solution to a puzzle in the analysis of tournaments, that of why there is no agent discrimination in practice. The paper examines the problem of a principal contracting with multiple agents whose activities are subject to common shocks, when there is moral hazard and adverse selection. The presence of common shocks invites the use of relative performance evaluation to minimize the costs of moral hazard. But, in the additional presence of adverse selection, the analysis shows that at the optimum there may be no need for ex ante screening through menus of contract offers (i.e., for agent discrimination). This is so because the principal becomes better informed ex post about agent types, via the realization of common uncertainty, and can effectively penalize or reward the agents ex post. Thus, unlike the standard adverse selection problem without common uncertainty where the principal always benefits from ex ante screening, it is shown that ex post sorting through relative performance evaluation reduces the scope for ex ante screening through menus, and eliminates it completely if agents are known to not be very heterogeneous. This is consistent with observed practice in industries where the primary compensation mechanism is a cardinal tournament which is uniform among agents.
Download or read book Payment Schemes and Moral Hazard written by James Foust and published by . This book was released on 2013 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: In a principal-agent relationship, the principal offers a take-it-or-leave-it contract to the agent, who decides to either accept it or not. In game theory terminology, the principal agent relationship is a Stackelberg game in which the principal is the leader, proposing the contract, and the agent is the follower, choosing to accept or reject the proposal. Examples of such relationships are plentiful, such as a principal bank manager hiring an agent employee to work as a teller, a principal land-owner acting hiring an agent farmer to grow crops on her land, or an insurance company offering a home insurance plan to a homeowner. The principal-agent problem concerns how the principal should structure the proposed contract to best incentivize the agent to perform in the way the principal would prefer, taking into account that there are informational asymmetries between the principal and the agent due to the agent having some kind of "private information." Information asymmetries between principal and agent fall into two categories: the agent might have private information about their own characteristics, which gives rise to adverse selection problems; or the agent might have private information about what actions he takes after agreeing to the contract, which gives rise to moral hazard problems. In this paper, I focus on a model with moral hazard. The texts by Kreps and Salanié both offer good expositions of canonical adverse selection and moral hazard problems, which I used as a starting point for this paper. The survey of different extensions of the principal-agent model by Sappington provided a high-level guide to different sub-problems and primary sources. To motivate the model analyzed in this paper, suppose you own several tracts of land that are suitable for agriculture. You want to set up farms on these tracts of land, but you lack the time or expertise to farm the land yourself. You decide, then, to hire several farmers to set up and manage farms on your land. The farmers work year-round and, come harvest time, you pay each of them a sum of money based on their total production. Your challenge is to decide how much money to pay each farmer. Ideally, you would like to be able to pay each worker for the amount of effort that they put in. Unfortunately, you are only able to observe each farmer's output, and there are factors other than the farmer's effort level that affect output. For instance, the amount of rainfall is a random variable that affects all farmers' output equally, but which you are unable to observe. There are also idiosyncratic random variables unique to each farmer that represent the effects of soil condition, pests, and other similar concerns on the tract of land that farmer is working. All else equal, each farmer would prefer to work as little as possible, because they find working displeasurable. As the principal, however, you want the farmers to work as hard as is necessary to maximize your profits. The problem you face is how to structure the farmers' payment scheme so as to align their incentives with your own. The following analysis will compare individual contracts, in which each agent's payment is based only on the realized magnitude of their output, and tournament payment schemes, in which each agent's payment is based only on the ordinal ranking of their realized output relative to that of all other agents'. Much of the model notation as well as the results from Section 5 are an expanded exposition of results from a paper by Green and Stokey. Lazear and Rosen provided helpful intuition for the comparison of contracts and tournaments, and some of the results from earlier sections of the paper are due to Grossman and Hart.
Download or read book Microeconomic Theory written by Pankaj Tandon and published by Taylor & Francis. This book was released on 2024-07-26 with total page 451 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides a comprehensive analysis of the theoretical tools, real-world applications, policy implications and corner solutions of microeconomics. It offers a discussion of all significant topics including applications and extension of consumer theory, theory of the firm, production, cost and supply, partial and general equilibrium, welfare economics, uncertainty and information, and market imperfections as well as a detailed overview of the theory of games. Apart from all the topics receiving both the algebraic and geometric treatment, the other distinguishing features of the book are an emphasis on policy implications and a full treatment of corner solutions. This latter feature has arisen out of the realization that students easily master interior solutions by memorizing the standard first-order conditions but do not necessarily understand the underlying concepts. Complete with several original algebraic derivations and graphical expositions, this book will serve as an indispensable textbook for students of microeconomics. The book will be useful to students, researchers, and teachers of economics, international economics, industrial economics, managerial economics, and agricultural economics. It will also be a useful reference for those studying public policy and law.
Download or read book Delegation and Accountability in Parliamentary Democracies written by Kaare Strøm and published by Oxford University Press. This book was released on 2006-01-19 with total page 784 pages. Available in PDF, EPUB and Kindle. Book excerpt: Comparative Politics is a series for students and teachers of political science that deals with contemporary issues in comparative government and politics. The General Editors are Max Kaase, Professor of Political Science, Vice President and Dean, School of Humanities and Social Science, International University Bremen, Germany; and Kenneth Newton, Professor of Comparative Politics, University of Southampton. The series is published in association with the European Consortium for Political Research. Today, parliamentarism is the most common form of democratic government. Yet knowledge of this regime type has been incomplete and often unsystematic. Delegation and Accountability in Parliamentary Democracies offers new conceptual clarity on the topic. This book argues that representative democracies can be understood as chains of delegation and accountability between citizens and politicians. Under parliamentary democracy, this chain of delegation is simple but also long and indirect. Principal-agent theory helps us to understand the perils of democratic delegation, which include the problems of adverse selection and moral hazard. Citizens in democratic states, therefore, need institutional mechanisms by which they can control their representatives. The most important such control mechanisms are on the one hand political parties and on the other external constraints such as courts, central banks, referendums, and supranational institutions such as those of the European Union. Traditionally, parliamentary democracies have relied heavily on political parties and presidential systems more on external constraints. This new empirical investigation includes all seventeen West European parliamentary democracies. These countries are compared in a series of cross-national tables and figures, and seventeen country chapters provide a wealth of information on four discrete stages in the delegation process: delegation from voters to parliamentary representatives, delegation from parliament to the prime minister and cabinet, delegation within the cabinet, and delegation from cabinet ministers to civil servants. Each chapter illustrates how political parties serve as bonding instruments which align incentives and permit citizen control of the policy process. This is complemented by a consideration of external constraints. The concluding chapters go on to consider how well the problems of delegation and accountability are solved in these countries. They show that political systems with cohesive and competitive parties and strong mechanisms of external constraint solve their democratic agency problems better than countries with weaker control mechanisms. But in many countries political parties are now weakening, and parliamentary systems face new democratic challenges. Delegation and Accountability in Parliamentary Democracies provides an unprecedented guide to contemporary European parliamentary democracies. As democratic governance is transformed at the dawn of the twenty-first century, it illustrates the important challenges faced by the parliamentary democracies of Western Europe.
Download or read book Optimal Retention in Principal Agent Models written by Jeffrey Banks and published by . This book was released on 2008 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the interaction between a single long-lived principal and a series of short-lived agents in the presence of both moral hazard and adverse selection. We assume that the principal can influence the agents' behavior only through her choice of a retention rule; this rule is further required to be sequentially rational (i.e., no precommitment is allowed). We provide general conditions under which equilibria exist in which (a) the principal adopts a 'cut-off' rule under which agents are retained only when the reward they generate exceeds a critical bound; and (b) agent separate according to type, with better agents taking superior actions. We show that in equilibrium, a retained agent's productivity is necessarily declining over time, but that retained agents are also more productive on average than untried agents due to selection effects. Finally, we show that for each given type, agents of that type are more productive in the presence of adverse selection than when there is pure moral hazard (i.e., when that type is the sole type of agent in the model); nonetheless, adding uncertainty about agent-types cannot benefit the principal except in uninteresting cases.
Download or read book Reform for Sale written by Perrin Lefebvre and published by Cambridge University Press. This book was released on 2023-01-31 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt: Lobbying competition is viewed as a delegated common agency game under moral hazard. Several interest groups try to influence a policy-maker who exerts effort to increase the probability that a reform be implemented. With no restriction on the space of contribution schedules, all equilibria perfectly reflect the principals' preferences over alternatives. As a result, lobbying competition reaches efficiency. Unfortunately, such equilibria require that the policy-maker pays an interest group when the latter is hurt by the reform. When payments remain non-negative, inducing effort requires leaving a moral hazard rent to the decision maker. Contributions schedules no longer reflect the principals' preferences, and the unique equilibrium is inefficient. Free-riding across congruent groups arises and the set of groups active at equilibrium is endogenously derived. Allocative efficiency and redistribution of the aggregate surplus is linked altogether and both depend on the set of active principals, as well as on the group size.
Download or read book Economic Analysis of Information and Contracts written by Gerald A. Feltham and published by Springer Science & Business Media. This book was released on 2012-12-06 with total page 412 pages. Available in PDF, EPUB and Kindle. Book excerpt: The three coeditors knew John Butterworth for many years and had worked closely with him on a number of research projects. We respected him as a valuable colleague and friend. We were greatly saddened by his untimely death. This book is an attempt to remember him. We dedicate the volume to John with thanks for the contributions he made to our research, to the Faculty of Commerce and Business Administration at the University of British Columbia, and to the accounting profession. This volume contains twelve invited papers on the general topic of the economic theory of information and contracts. We asked leading scholars who had known John to contribute papers. The response was very gratifying. The authors provided us with new strong research papers that should make a lasting contribution to the accounting and information economics research literature, and make us all proud to have put this volume together. The research papers in the volume are in three sections: information evaluation in multi person conte)l:ts; contracting in agencies under moral hazard; and contracting in agencies with private information. We begin part I with Jerry Feltham's review of John Butterworth's pioneering contributions to the accounting and information economics literature. This is followed by an introduction to the papers in the volume and the papers themselves.
Download or read book INFORMATION ASYMMETRY BETWEEN PRINCIPAL AND AGENT IN SOME PERFORMANCE EVALUATION MODELS written by Shaopeng Li and published by . This book was released on 2020 with total page 157 pages. Available in PDF, EPUB and Kindle. Book excerpt: The research question on problems that involves information asymmetry has been drawing more and more attention since the past decades, and in particular, two of the pioneers Bengt Holmström and Oliver Hart) in this field won the Nobel Prize of Economics in 2016. With the emergence of information economics, accounting researchers started focusing on the information asymmetry problems, with a particular interest and emphasis on moral hazard problems, within the firm. In this essay, we intend to fill the blank in this area by investigating some specific information asymmetry problems in managerial accounting under the presence of both moral hazard and adverse selection, or moral hazard and post-contract information asymmetry, respectively. The first study analyzes the expected value of information about an agent's type in the presence of moral hazard and adverse selection. The value of the information decreases in the variability of output and the agent's risk aversion, two factors that are typically associated with the severity of the moral hazard problem. However, the value of the information about agent type first increases but ultimately decreases in the severity of adverse selection. The second study draws attention to the tradeoffs associated with relying on pre-contracting ability measures in the design of executive compensation schemes. We show that the more sensitive of the ability signal to ability the more weight should be placed optimally, and the more precise of the ability signal the more weight should be placed optimally, in accordance with the informativeness principal. We further prove that under a broad class of distributions a linear aggregation of multiple pieces of pre-contracting information is sufficient for contracting purposes without loss of generality. The third study investigates three mechanisms of organizational control: outcome control (contracting on the outcome), effort control (contracting on the signal of action), and clan control (employing an agent whose preferences are partially aligned with the principal's goal through a socialization process). In doing so, we expand the standard agency framework by introducing the concept of other-regarding preference and clan control to provide new insights into organizational control design.
Download or read book Adverse Selection and Moral Hazard with Risk neutral Agent written by and published by . This book was released on 1980 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book On Risk and Moral Hazard in Principal agent and Cooperative Effort Arrangements written by Anjan V. Thakor and published by . This book was released on 1988 with total page 178 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Essays on Principal agent Models with Moral Hazard and Incomplete Information written by Randolph Garth Silvers and published by . This book was released on 2005 with total page 340 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Handbook of Research on Entrepreneurship and Conflict written by Wim Naudé and published by Edward Elgar Publishing. This book was released on 2024-07-05 with total page 351 pages. Available in PDF, EPUB and Kindle. Book excerpt: This Handbook focuses on the complex relationship between entrepreneurship and conflict. Editors Wim Naudé and Bernadette Power construct a broad overview of central research themes in the field, covering states being captured by entrepreneurs, states capturing businesses, entrepreneurship in post-conflict reconstruction, and entrepreneurs in conflict against other entrepreneurs.
