In a repeated principal-agent model with moral hazard, in which the agent has βδ-preferences, we analyze the case where the agent is näıve in the sense that he is not fully aware of his inconsistent discounting. We consider the possibility of principal manipulating the näıveté of the agent. Surprisingly, when the principal wants to implement the high effort, there are no gains to the principal ...

This note considers the simplest possible organization: one boss (or “Principal”) and one worker (or “Agent”). One of the earliest applications of this Principal-Agent model was to sharecropping, where the landowner was the Principal and the tenant farmer the Agent, but in this course we will typically talk about more familiar organization structures. For example, we might consider a firm’s sha...

We consider a contracting problem in which a principal hires an agent to manage a risky project. When the agent chooses volatility components of the output process and the principal observes the output continuously, the principal can compute the quadratic variation of the output, but not the individual components. This leads to moral hazard with respect to the risk choices of the agent. To find...

We concentrate on a principal and agent system often seen in supply chain management studies. Under reasonable conditions, we show that a nearly systematic three-step method can be used to find coordination contracts for the system. The number of terms involved in our contract is in some sense positively correlated with the degree of information asymmetry between the principal and agent. Severa...

This article examines whether a principal prefers to hire a fair or a selfish agent. A fair agent cares to some extent for the well-being of other people and thus he also cares for the principal. Therefore, if the agent performs solitary work, the principal is always better off to hire a fair agent. However, we show that when a third party with conflicting interests is introduced, it may be adv...

The relationship between competition and performance–related pay has been analyzed in single–principal–single–agent models. While this approach yields good predictions for managerial pay schemes, the predictions fail to apply for employees at lower tiers of a firm’s hierarchy. This paper describes a principal multi-agent model of incentive pay that analyzes the effect of changes in the competit...

This paper extends Levin’s (2003) relational contract model by having not only the agent’s cost of effort (agent’s type), but also the value of that effort to the principal (principal’s type) subject to i.i.d. shocks. When optimal effort is fully pooled across agent types for multiple principal types, it is also pooled across those principal types. When optimal effort separates some agent types...