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Consumers and Agency Problems

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  • Canice J. Prendergast

Abstract

Consumers solve many agency problems, by pointing out when they believe that agents have made mistakes. This paper considers the role that consumers play in inducing efficient behavior by agents. I distinguish between two case: those where consumers have similar preferences to the principal, and those where consumer preferences diverge from those of the principal. In the former case, allowing consumer feedback improves allocations, and increasing consumer information is unambiguously beneficial. In the case where consumers disagree with principals over desired outcomes, which characterizes many benefits given by the public sector, consumers feedback about the performance of agents can reduce welfare. This may result in efficiently restricting the ability of consumers to complain about agent performance.

Suggested Citation

  • Canice J. Prendergast, 2001. "Consumers and Agency Problems," NBER Working Papers 8445, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8445
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    References listed on IDEAS

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    1. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
    2. repec:ner:ucllon:http://discovery.ucl.ac.uk/17678/ is not listed on IDEAS
    3. Carmichael, H Lorne, 1988. "Incentives in Academics: Why Is There Tenure?," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 453-472, June.
    4. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
    5. Guido Friebel & Michael Raith, 2004. "Abuse of Authority and Hierarchical Communication," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 224-244, Summer.
    6. Milbourn, Todd T & Shockley, Richard L & Thakor, Anjan V, 2001. "Managerial Career Concerns and Investments in Information," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 334-351, Summer.
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    Cited by:

    1. Andrea Prat, 2005. "The Wrong Kind of Transparency," American Economic Review, American Economic Association, vol. 95(3), pages 862-877, June.
    2. Howell, Bronwyn, 2001. "Health Sector Failures in New Zealand: Act of God, Act of Man or Inadequacies in Control Design," Working Paper Series 19000, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    3. Howell, Bronwyn, 2001. "Health Sector Failures in New Zealand: Act of God, Act of Man or Inadequacies in Control Design," Working Paper Series 3901, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    4. repec:vuw:vuwscr:19000 is not listed on IDEAS

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    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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