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Optimal Incentive Schemes When Only the Agents' "Best" Output Matters to the Principal

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  • Steven D. Levitt

Abstract

Standard principal-agent models assume that the principal's payoff is a function of the total output of all agents. In many real-world situations, however, the principal's payoff is based solely on the "best" of the agents' outputs (e.g., the first agent to make an innovation, the most creative advertising campaign, or the cheapest product design). The results obtained from such a model differ from the standard results in a number of respects. For instance, even when identical agents perform identical tasks, the optimal incentive scheme will often differ across agents. Also, the principal may want to increase the variance of the agents' output or reduce the correlation of output across agents, even when the agents are risk averse.

Suggested Citation

  • Steven D. Levitt, 1995. "Optimal Incentive Schemes When Only the Agents' "Best" Output Matters to the Principal," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 744-760, Winter.
    • Handle: RePEc:rje:randje:v:26:y:1995:i:winter:p:744-760
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    Citations

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    Cited by:

    1. Wallace E. Huffman & Richard E. Just, 2000. "Setting Efficient Incentives for Agricultural Research: Lessons from Principal-Agent Theory," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 828-841.
    2. Esther Gal‐Or, 1997. "Multiprincipal Agency Relationships as Implied by Product Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 235-256, June.
    3. Huffman, Wallace E., 1999. "New Insights on the Organization of Agricultural Research: Theory and Evidence for Western Developed Countries," ISU General Staff Papers 199907010700001319, Iowa State University, Department of Economics.
    4. Thomas, Jonathan P. & Wang, Zhewei, 2013. "Optimal punishment in contests with endogenous entry," Journal of Economic Behavior & Organization, Elsevier, vol. 91(C), pages 34-50.
    5. Jovanovic, Dragan, 2013. "Mergers, managerial incentives, and efficiencies," DICE Discussion Papers 88, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. Scott M Gilpatric, 2009. "Risk Taking In Contests And The Role Of Carrots And Sticks," Economic Inquiry, Western Economic Association International, vol. 47(2), pages 266-277, April.
    7. Barbieri, Stefano & Malueg, David A., 2016. "Private-information group contests: Best-shot competition," Games and Economic Behavior, Elsevier, vol. 98(C), pages 219-234.
    8. Baliga, Sandeep & Sjostrom, Tomas, 2001. "Optimal Design of Peer Review and Self-Assessment Schemes," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 27-51, Spring.
    9. David Pérez-Castrillo & David Wettstein, 2012. "Innovation Contests," Working Papers 654, Barcelona School of Economics.
    10. Goldfain, Ekaterina & Kovac, Eugen, 2005. "Financing of Competing Projects with Venture Capital," Bonn Econ Discussion Papers 37/2005, University of Bonn, Bonn Graduate School of Economics (BGSE).
    11. Lohr, Luanne & Park, Timothy A., 2003. "Improving Extension Effectiveness for Organic Clients: Current Status and Future Directions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(3), pages 1-17, December.
    12. Yigal Gerchak & Christian Schmid, 2022. "Principal–agent models where a principal is only affected by extreme performances," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 468-477, March.
    13. Lohr, Luanne & Park, Timothy A., 2004. "Benchmarking Organizational Performance Of University Extension: A Stochastic Frontier Approach," Faculty Series 16721, University of Georgia, Department of Agricultural and Applied Economics.
    14. Lohr, Luanne & Park, Timothy A., 2008. "Testing Nonlinear Logit Models of Performance Effectiveness Ratings: Cooperative Extension and Organic Farmers," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 40(2), pages 667-679, August.
    15. repec:eee:labchp:v:3:y:1999:i:pc:p:3529-3571 is not listed on IDEAS
    16. Huffman, Wallace E., 1999. "Finance, Organization, and Impacts of U.S. Agricultural Research: Future Prospects," ISU General Staff Papers 199903010800001315, Iowa State University, Department of Economics.
    17. Huffman, Wallace E. & Just, Richard E., 1999. "Setting Efficient Incentives for Agricultural Research: Lesson from Principal-Agent Theory II," ISU General Staff Papers 199908010700001321, Iowa State University, Department of Economics.
    18. Park, Timothy A. & Lohr, Luanne, 2007. "Performance evaluation of university extension providers: A frontier approach for ordered response data," European Journal of Operational Research, Elsevier, vol. 182(2), pages 899-910, October.
    19. Agranov, Marina & Tergiman, Chloe, 2013. "Incentives and compensation schemes: An experimental study," International Journal of Industrial Organization, Elsevier, vol. 31(3), pages 238-247.
    20. Bin Hu & Damian R. Beil & Izak Duenyas, 2013. "Price-Quoting Strategies of an Upstream Supplier," Management Science, INFORMS, vol. 59(9), pages 2093-2110, September.

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