Essays on Incongruent Preferences for Effort Allocations in Multi-Task Agency Relations

This thesis comprises three self-contained essays that deal with inefficient effort allocations in multi-task agency relations with moral hazard. The first essay analyzes a multi-task agency framework where the agent exhibits task-specific abilities. Besides investigating the appendant consequences of applying incongruent performance measures in incentive contracts, this essay demonstrates that the provision of incentives—including the optimal aggregation of information— takes the agent’s task-specific abilities into consideration. It further emphasizes the relation between job characteristics and the principal’s preference for selecting specific agents. This essay essentially demonstrates that differences in task-specific abilities across agents can explain why they are allocated to various jobs; or why they receive different incentive contracts, even if their jobs are identical. The second essay considers a multi-task agency model with a risk-neutral and financially constrained agent. It analyzes the inefficiency of the agent’s induced effort allocation across tasks when the principal has only access to an incongruent information system about the agent’s performance. This essay further investigates the costly acquisition of information aimed at improving the agent’s performance evaluation, and therefore, mitigating her effort distortion. It contrasts two alternatives for the principal: (i) to centrally invest in the information acquisition; or (ii), to delegate this task to a supervisor. This essay demonstrates that the principal generally favors delegation for a sufficiently incongruent information system, and a centralized investment, otherwise. This can be observed if the supervisor’s performance evaluation is adequately precise. Otherwise, the contrary implication applies. The third essay analyzes incongruent preferences between firms for the characteristics of exchanged goods as an inefficiency of mutual market transactions, and collusive behavior within firms as an inefficiency of integrated transactions. It investigates the consequences of both inefficiencies on (i) firms’ decision on whether to integrate transactions or to utilize the market; and (ii), the properties of contractual arrangements. This essay proposes two important implications. First, diverging preferences between firms affect diametrically their benefits of mutual market transactions. Better aligned preferences are thereby disadvantageous from the demanding firm’s perspective since it imposes higher costs to ensure relation-specific investments. Second, anticipated collusion may force firms to employ market transactions, even if integrated transactions would have been more efficient otherwise. Nevertheless, potential collusion can be beneficial if it facilitates the achievement, or improves the efficiency, of superior relational contracts within and between firms due to a worse fall-back alternative.