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How should a principal reward and support agents when firm performance is characterized by success or failure?

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  • Christian Schmid
  • Yigal Gerchak

Abstract

Principal‐agent models with multiple agents typically assume that the principal wishes to maximize the sum of the agents' achievements (net of the rewards paid to them). But in many settings, like R&D, all that the principal “needs” is that at least one agent will be “successful.” We identify settings where the principal actually wants agents to refrain from exerting high effort in order to save expected compensation. We show that the number of agents can decrease in the project's value for the principal. We also consider sequential efforts and investigate settings where the principal can provide support to agents.

Suggested Citation

  • Christian Schmid & Yigal Gerchak, 2019. "How should a principal reward and support agents when firm performance is characterized by success or failure?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 40(4), pages 353-362, June.
    • Handle: RePEc:wly:mgtdec:v:40:y:2019:i:4:p:353-362
    DOI: 10.1002/mde.3006
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    Cited by:

    1. 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.

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