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Too few cooks spoil the broth

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  • Marisa Ratto
  • Wendelin Schnedler

Abstract

We consider a principal-agent relationship in which two tasks need to be carried out. Each task involves a decision. The principal can neither contract on the two decisions nor on the benefit which she receives from them but only on a signal, which simultaneously reflects both. We show that the efficient choice cannot be achieved if the principal employs a single agent. If, however, the principal employs a second agent, she can set a payment scheme such that the efficient choice can be implemented. We also examine when this implementation is vulnerable to collusion.

Suggested Citation

  • Marisa Ratto & Wendelin Schnedler, 2003. "Too few cooks spoil the broth," The Centre for Market and Public Organisation 03/090, The Centre for Market and Public Organisation, University of Bristol, UK.
    • Handle: RePEc:bri:cmpowp:03/090
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    File URL: http://www.bris.ac.uk/Depts/CMPO/workingpapers/wp90.pdf
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    References listed on IDEAS

    as
    1. Roland Strausz, 1997. "Delegation of Monitoring in a Principal-Agent Relationship," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(3), pages 337-357.
    2. Kofman, Fred & Lawarree, Jacques, 1993. "Collusion in Hierarchical Agency," Econometrica, Econometric Society, vol. 61(3), pages 629-656, May.
    3. Susan Athey & John Roberts, 2001. "Organizational Design: Decision Rights and Incentive Contracts," American Economic Review, American Economic Association, vol. 91(2), pages 200-205, May.
    4. George Baker, 2002. "Distortion and Risk in Optimal Incentive Contracts," Journal of Human Resources, University of Wisconsin Press, vol. 37(4), pages 728-751.
    5. Olsen, Trond E & Torsvik, Gaute, 1998. "Collusion and Renegotiation in Hierarchies: A Case of Beneficial Corruption," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 413-438, May.
    6. Strausz, R.G., 1995. "Delegation of Monitoring in a Principal-Agent Relationship," Other publications TiSEM 7b745873-4687-47ee-afc3-9, Tilburg University, School of Economics and Management.
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    Citations

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    Cited by:

    1. Christian Espinosa & Juan Gorigoitía & Carlos Maquieira, 2012. "Nonlinear behaviour of EMBI index:the case of eastern European countries," Working Papers 37, Facultad de Economía y Empresa, Universidad Diego Portales.
    2. Paul A. Grout & Wendelin Schnedler, 2008. "Non-Profit Organizations in a Bureaucratic Environment," The Centre for Market and Public Organisation 08/202, The Centre for Market and Public Organisation, University of Bristol, UK.
    3. Kragl, Jenny & Schöttner, Anja, 2011. "Wage Floors and Optimal Job Design," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48731, Verein für Socialpolitik / German Economic Association.
    4. Jenny Kragl & Anja Schöttner, 2014. "Wage Floors, Imperfect Performance Measures, And Optimal Job Design," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 525-550, May.
    5. Felipe Balmaceda, 2012. "On the Optimality of One-size-fits-all Contracts: The Limited Liability Case," Documentos de Trabajo 291, Centro de Economía Aplicada, Universidad de Chile.
    6. Chen, Bo, 2012. "All-or-nothing payments," Journal of Mathematical Economics, Elsevier, vol. 48(3), pages 133-142.
    7. Ratto Marisa & Schnedler Wendelin, 2008. "Too Few Cooks Spoil the Broth: Division of Labor and Directed Production," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-19, August.
    8. repec:awi:wpaper:0474 is not listed on IDEAS

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    More about this item

    Keywords

    hidden action; moral hazard; optimal contract; job design; asymmetric information;
    All these keywords.

    JEL classification:

    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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