Way of doing matters! Contract design and resource allocation
Résumé
We consider a contract design problem where an agent runs a project that requires two kinds of actions/inputs. We consider a new type of asymmetric information: whereas the principal can control the global amount of resources (working time, e ort, money, etc) that the agent puts into the project, he has no information (or no direct control) regarding the `way" the agent produces, i.e. he has no information on the allocation of the resources between the two actions/inputs. This model di ers from the multitask problem (see Holmstrom and Milgrom 1987). We show that the optimal incentive contract cannot reach the rst best although the principal can contract upon the total amount of resources spent by the agent. Moreover, we show that the second best level of resources is lower (or equal) to its rst best level. We also discuss how the principal chooses to make or buy depending on the substitutability/complementarity of the actions. Our model applies to optimal production contract design with asymmetric information on the production process and to optimal budget design in federations when the central government has no control on the allocation of local governments' spendings.
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