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on Contract Theory and Applications |
| By: | Bo Peng; Zhihao Gavin Tang |
| Abstract: | We consider the robust contract design problem when the principal only has limited information about the actions the agent can take. The principal evaluates a contract according to its worst-case performance caused by the uncertain action space. Carroll (AER 2015) showed that a linear contract is optimal among deterministic contracts. Recently, Kambhampati (JET 2023) showed that the principal's payoff can be strictly increased via randomization over linear contracts. In this paper, we characterize the optimal randomized contract, which remains linear and admits a closed form of its cumulative density function. The advantage of randomized contracts over deterministic contracts can be arbitrarily large even when the principal knows only one non-trivial action of the agent. Furthermore, our result generalizes to the model of contracting with teams, by Dai and Toikka (Econometrica 2022). |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.11528&r= |
| By: | Marc Claveria-Mayol; Pau Mil\'an; Nicol\'as Oviedo-D\'avila |
| Abstract: | Risk-averse workers in a team exert effort to produce joint output. Workers' incentives are connected via chains of productivity spillovers, represented by a network of peer-effects. We study the problem of a principal offering wage contracts that simultaneously incentivize and insure agents. We solve for the optimal linear contract for any network and show that optimal incentives are loaded more heavily on workers that are more central in a specific way. We conveniently link firm profits to network structure via the networks spectral properties. When firms can't personalize contracts, better connected workers extract rents. In this case, a group composition result follows: large within-group differences in centrality can decrease firm's profits. Finally, we find that modular production has important implications for how peer structures distribute incentives. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.11712&r= |
| By: | Marc Claveria-Mayol |
| Abstract: | I study a moral hazard problem between a principal and multiple agents who experience positive peer effects represented by a (weighted) network. Under the optimal linear contract, the principal provides high-powered incentives to central agents in the network in order to exploit the larger incentive spillovers such agents create. The analysis reveals a novel measure of network centrality that captures rich channels of direct and indirect incentive spillovers and characterizes the optimal contract and its induced equilibrium efforts. The notion of centrality relevant for incentive spillovers in the model emphasizes the role of pairs of agents who link to common neighbors in the network. This characterization leads to a measure of marginal network effects and identifies the agents whom the principal targets with stronger incentives in response to the addition (or strengthening) of a link. When the principal can position agents with heterogeneous costs of effort in the network, the principal prefers to place low-cost agents in central positions. The results shed light on how firms can increase productivity through corporate culture, office layout, and social interactions. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.11660&r= |
| By: | Luca Picariello (University of Naples "Federico II" and CSEF); Alexander Rodivilov (School of Business, Stevens Institute of Technology.) |
| Abstract: | We study a framework in which agents can generate signals to increase their expected productivity. Such signals can be generated in heterogeneous environments: a flexible system in which the agent can freely allocate effort across different tasks, and a rigid system in which the agent must devote effort to all tasks. We provide sufficient and necessary conditions for optimal experimentation in each system. Experimentation is less likely if the agent has high bargaining power. Competition within the Flexible system makes specialization more likely. When agents from different systems compete, there is a unique equilibrium where both agents experiment if the Rigid System is restrictive enough. |
| Keywords: | Career Concerns, Experimentation, Learning. |
| JEL: | D61 D83 I21 I23 I28 J63 J65 |
| Date: | 2024–06–26 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:724&r= |