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Production Externalities and Two-Way Distortion in Principal-Multi-Agent Problems

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  • Lockwood, Ben

Abstract

This paper studies an otherwise standard principal-agent problem with hidden information, but whether there are positive production externalities between agents: the output of any agent depends positively on the e¤ort expended by other agents. It is shown that the optimal contract for the principal exhibits two-way distortion: the e¤ort of any agent is oversupplied (relative to the …rst-best) when his marginal cost of e¤ort is low, and undersupplied his marginal cost of e¤ort is high. This pattern of distortion cannot otherwise arise in optimal single- or multi-agent incentive contracts, unless there are countervailing incentives. However, unlike the countervailing incentives case, the pattern of distortion is robust to the precise form of the externality.

Suggested Citation

  • Lockwood, Ben, 1999. "Production Externalities and Two-Way Distortion in Principal-Multi-Agent Problems," Economic Research Papers 269249, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269249
    DOI: 10.22004/ag.econ.269249
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    Cited by:

    1. Yohan Pelosse, 2014. "Dynamic Difference-Form Contests," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(3), pages 401-426, June.
    2. Csorba, Gergely, 2008. "Screening contracts in the presence of positive network effects," International Journal of Industrial Organization, Elsevier, vol. 26(1), pages 213-226, January.
    3. Michela Cella & Federico Etro, 2010. "Oligopolistic Screening and Two-way Distortion," Working Papers 2010_28, Department of Economics, University of Venice "Ca' Foscari".
    4. Meng, Dawen & Tian, Guoqiang, 2013. "Entry-Deterring Nonlinear Pricing with Bounded Rationality," MPRA Paper 57935, University Library of Munich, Germany, revised May 2014.
    5. Isabelle Brocas, 2008. "Optimal choice of characteristics for a nonexcludable good," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 283-304, March.

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    More about this item

    Keywords

    Agricultural and Food Policy; Production Economics;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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