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Principal and Expert Agent

James M. Malcomson
- 28 May 2009 - 
- Vol. 9, Iss: 1, pp 1-36
TLDR
Analysis of principal-agent contracts when the risk-averse agent's action generates information that is not directly verifiable but is used to make a risky decision in a formulation more general than previously studied focuses on the impact on the decision made and the contract used.
Abstract: 
This paper analyses principal-agent contracts when the agent's action generates information not directly verifiable but used by the agent to make a risky decision. It considers a more general formulation than those studied previously, focusing on the impact on the decision made and the contract between principal and agent. It establishes a precise sense in which distorting decisions reduces the risk borne by a risk-averse agent and conditions under which implementing an optimal decision rule imposes no substantive restrictions on the contract. The paper also uses an application to bidding to supply a good or service to illustrate those results and derive additional ones. A risk-neutral agent with limited liability may optimally choose lower, less risky bids or higher, more risky bids, according to which relaxes the limited liability constraint. There are also natural conditions under which optimal contracts are monotone, possibly with flat sections, like stock option rewards.

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Journal ArticleDOI

Specific knowledge and performance measurement

Michael Raith
- 01 Dec 2008 - 
TL;DR: Examination of optimal incentives and performance measurement in a setting where an agent has specific knowledge about the consequences of their actions for the principal shows how the optimal choice of performance measures and incentives depends on the agent's knowledge, environmental risk, technological uncertainty, and job complexity.
Journal ArticleDOI

Collusion and the organization of delegated expertise

Denis Gromb, +4 more
- 01 Nov 2007 - 
TL;DR: It is shown that absent collusion, the multiexpert organization dominates the single expert organization, however, this ranking is reversed when the experts can collude among themselves and with the principal (vertical collusion).
Journal ArticleDOI

Contracts with endogenous information

Dezsoe Szalay
- 01 Mar 2009 - 
TL;DR: In this paper, covert information acquisition and reporting in a principal agent problem allowing for general technologies of information acquisition is studied, where posteriors satisfy two dimensional versions of the standard First Order Stochastic Dominance and Concavity/Convexity of the Distribution Function conditions, a first-order approach is justified.
Journal ArticleDOI

Specific Knowledge and Performance Measurement

Michael Raith
- 02 Jul 2008 - 
TL;DR: In this article, the authors examine optimal incentives and performance measurement in a model where an agent has specific knowledge about the consequences of his actions for the principal, and show that it is optimal to use both kinds of performance measures.
Journal ArticleDOI

Do Managers with Limited Liability Take More Risky Decisions? An Information Acquisition Model

James M. Malcomson
- 01 Mar 2011 - 
TL;DR: The authors showed that risk-neutral individuals take more risky decisions when they have limited liability and that making a decision after acquiring information provides an additional reason to those in the classic principalagent literature for using contracts with pay increasing in the return.
References
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Journal ArticleDOI

Moral Hazard and Observability

Bengt Holmstrom
- 01 Jan 1979 - 
TL;DR: In this article, the role of imperfect information in a principal-agent relationship subject to moral hazard is considered, and a necessary and sufficient condition for imperfect information to improve on contracts based on the payoff alone is derived.
Journal ArticleDOI

A Theory of Incentives in Procurement and Regulation.

Mark Armstrong
- 01 Jan 1995 - 
TL;DR: A Theory of Incentives in Procurement and Regulation (TIIN) as mentioned in this paper is a popular textbook for regulatory economics, with a particular focus on the regulation of natural monopolies such as military contractors, utility companies and transportation authorities.
Book

A Theory of Incentives in Procurement and Regulation

Jean Tirole, +1 more
TL;DR: A Theory of Incentives in Procurement and Regulation (TIIN) as mentioned in this paper is a popular textbook for regulatory economics, with a particular focus on the regulation of natural monopolies such as military contractors, utility companies and transportation authorities.
Journal ArticleDOI

Formal and Real Authority in Organizations

Philippe Aghion, +1 more
- 01 Jan 1997 - 
TL;DR: In this article, the authors developed a theory of the allocation of formal authority and real authority within organizations, and illustrated how a formally integrated structure can accommodate various degrees of "real" integration.
Book ChapterDOI

An analysis of the principal-agent problem

Sanford J. Grossman, +3 more
- 01 Jan 1983 - 
TL;DR: In this article, the authors show that the optimal way of implementing an action by an agent can be found by solving a convex programming problem, and they use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem.
Related Papers (5)

Executive Effort and Selection of Risky Projects

Richard A. Lambert
- 21 Jan 1986 - 

Information Management in Incentive Problems

Tracy R. Lewis, +1 more
- 01 Aug 1997 - 

Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design

Bengt Holmstrom, +1 more
- 01 Jan 1991 - 

Moral Hazard and Observability

Bengt Holmstrom
- 01 Jan 1979 - 

Contracts and Productive Information Gathering

Jacques Crémer, +2 more
- 01 Nov 1998 - 
Frequently Asked Questions (1)
Q1. What are the contributions mentioned in the paper "Principal and expert agent" ?

This paper analyses principal-agent contracts when the agent ’ s action generates information not directly verifiable but used by the agent to make a risky decision. It considers a more general formulation than those studied previously, focusing on the impact on the decision made and the contract between principal and agent. The paper also uses an application to bidding to supply a good or service to illustrate those results and derive additional ones.