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Using Trembling-Hand Perfection to Alleviate the Interlinked Principal-Agent Problem

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  • Allen, Beth

Abstract

For a simple interlinked principal-agent problem, equilibrium may b e inefficient to the principals. When each agent's discrete effort and a common random variable (observable to agents, but not principals) jointly determine the principals' payoffs in a moral hazard problem, agents may tend to shirk. However, slight uncertainty about the rationality of other agents' strategies can reduce incentives to shirk. In particular, the trembling-hand perfect refinement of Nash equilibria can result in more effort and higher payoffs to the principal. Unfortunately, these efficiency gains diminish as additional intermed diate effort levels are added to the model. Copyright 1988 by The editors of the Scandinavian Journal of Economics.

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  • Allen, Beth, 1988. "Using Trembling-Hand Perfection to Alleviate the Interlinked Principal-Agent Problem," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 373-382.
    • Handle: RePEc:bla:scandj:v:90:y:1988:i:3:p:373-82
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    Cited by:

    1. Ng, Yew-Kwang & Shi, He-ling, 1995. "Work quality and optimal pay structure: Piece vs. hourly rates in employee remuneration," Economics Letters, Elsevier, vol. 47(3-4), pages 409-416, March.
    2. Oriol Carbonell-Nicolau, 2021. "Perfect equilibria in games of incomplete information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1591-1648, June.
    3. Oriol Carbonell-Nicolau, 2011. "The Existence of Perfect Equilibrium in Discontinuous Games," Games, MDPI, vol. 2(3), pages 1-22, July.

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