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Multitask principal-agent problems: Optimal contracts, fragility, and effort misallocation

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  • Bond, Philip
  • Gomes, Armando

Abstract

We analyze a tractable class of multitask principal-agent problems, such as the one faced by a firm with a manager overseeing several projects. We allow for tasks to be complements or substitutes. We avoid the problems associated with the first-order approach by directly characterizing the shape of the agent's indirect utility function, which exhibits a convex then concave shape in effort. We identify a new source of allocational inefficiency across tasks: excessive concentration, and its consequence, insufficient risk taking. Optimal incentive schemes in our environment are generally "fragile": small changes in fundamentals can cause the agent's effort to collapse.

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  • Bond, Philip & Gomes, Armando, 2009. "Multitask principal-agent problems: Optimal contracts, fragility, and effort misallocation," Journal of Economic Theory, Elsevier, vol. 144(1), pages 175-211, January.
    • Handle: RePEc:eee:jetheo:v:144:y:2009:i:1:p:175-211
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    5. Florian Hoffmann & Roman Inderst & Marcus Opp, 2022. "The Economics of Deferral and Clawback Requirements," Journal of Finance, American Finance Association, vol. 77(4), pages 2423-2470, August.
    6. Florian Ederer & Richard Holden & Margaret Meyer, 2018. "Gaming and strategic opacity in incentive provision," RAND Journal of Economics, RAND Corporation, vol. 49(4), pages 819-854, December.
    7. Hayat Khan, 2019. "A Nontechnical Guide on Optimal Incentives for Islamic Insurance Operators," JRFM, MDPI, vol. 12(3), pages 1-14, July.
    8. Zahra Murad & Charitini Stavropoulou & Graham Cookson, 2019. "Incentives and gender in a multi-task setting: An experimental study with real-effort tasks," PLOS ONE, Public Library of Science, vol. 14(3), pages 1-18, March.
    9. Chen, Bo, 2012. "All-or-nothing payments," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 133-142.
    10. Orlov, Dmitry, 2022. "Frequent monitoring in dynamic contracts," Journal of Economic Theory, Elsevier, vol. 206(C).
    11. Cristina Nistor & Matthew Selove, 2020. "Pricing and Quality Provision in a Supply Relationship: A Model of Efficient Relational Contracts," Marketing Science, INFORMS, vol. 39(5), pages 939-955, September.
    12. Hartman-Glaser, Barney & Piskorski, Tomasz & Tchistyi, Alexei, 2012. "Optimal securitization with moral hazard," Journal of Financial Economics, Elsevier, vol. 104(1), pages 186-202.
    13. D'Acunto, Francesco & Xie, Jin & Yao, Jiaquan, 2022. "Trust and contracts: Empirical evidence," LawFin Working Paper Series 32, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    14. Kirkegaard, René, 2023. "Endogenous criteria for success," Journal of Economic Theory, Elsevier, vol. 214(C).
    15. Margaret Meyer & Bruno Strulovici, 2013. "The Supermodular Stochastic Ordering," Discussion Papers 1563, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    16. Margaret Meyer & Bruno Strulovici, 2013. "Beyond Correlation: Measuring Interdependence Through Complementarities," Economics Series Working Papers 655, University of Oxford, Department of Economics.
    17. Demougin, Dominique & Helm, Carsten, 2023. "Overwhelmed by routine tasks: A multitasking principal agent perspective," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 654-669.
    18. Zhaolin Li & Steven Q. Lu & Jennifer K. Ryan & Daewon Sun, 2021. "Impact of Organizational Structure on Development Strategy under Equity‐Based Incentives," Production and Operations Management, Production and Operations Management Society, vol. 30(4), pages 984-996, April.
    19. Felipe Balmaceda, 2011. "Job Design and Incentives," Documentos de Trabajo 279, Centro de Economía Aplicada, Universidad de Chile.
    20. Li, Jin & Powell, Michael, 2020. "Multilateral interactions improve cooperation under random fluctuations," Games and Economic Behavior, Elsevier, vol. 119(C), pages 358-382.

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