The conflict between Pareto optimality and incentive compatibility, that is, the fact that some Pareto optimal (efficient) allocations are not incentive compatible is a fundamental fact in information economics, mechanism design and general equilibrium with asymmetric information. This important result was obtained assuming that the individuals are expected utility maximizers. Although this ass...

Hedge fund managers charge management fees on assets under management (AUM) and incentive fees indexed to the high-water mark (HWM). We study the effects of fees and alpha on managerial dynamic leverage choice and valuation. Our main results are: (i) high-powered incentive fees encourage excessive risk taking, while management fees have the opposite effect; (ii) agency conflicts have significan...

We estimate an agency model using the payroll records of a copper mine that paid a production bonus to teams of workers. We estimate the cost of incomplete information due to insurance and incentives considerations and the inefficiency caused by the simple form of the incentive contract itself. At the estimated parameters the cost of worker risk aversion (insurance) is of similar magnitude to m...

A substantial effort has been devoted to various incentive Stackelberg solution concepts. Most of these concepts work well in the sense that the leader can get his desired solution in the end. Yet, most incentive strategies developed thus far include either the follower’s control, which may not be realistic in practice, or delays in the state, which makes stabilization more difficult to achieve...

In the private values single object auction model, we construct a satisfactory mechanism a symmetric, dominant strategy incentive compatible, and budget-balanced mechanism. Our mechanism allocates the object to the highest valued agent with more than 99% probability provided there are at least 14 agents. It is also ex-post individually rational. We show that our mechanism is optimal in a restri...

The curse of the Revelation Principle is that it leads us to focus on unrealistic mechanisms in which agents report all private information to the principal, who then makes all decisions centrally. This is not true when communication costs are introduced. Then partial communication of information, sequential back-and-forth conversations, and decentralization of decisions become part of optimal ...

This Article argues that marriage is an economically efficient institution, designed and evolved to regulate incentive problems that arise between a man and a woman over the life cycle of procreation. As such, its social and legal characteristics will provide a poor match for the incentive problems that arise in the two distinctly different relationships of gay and lesbian couples. Forcing all ...

We analyze the optimal combination of promotion tournaments and individual performance pay in an employment relationship. An agent’s effort is non-observable and he has private information about his suitability for promotion. Thus, promotion tournaments and individual performance pay need to be combined to serve both incentive and selection purposes. We find that, if it is sufficiently importan...

This paper analyses the impact of retailer overconfidence psychology on incentive contract for a manufacturer-retailer supply chain, where product quality is affected by the manufacturer and the retailer’s behaviors. There exists double-sided moral hazard in the supply chain. Using principal-agent model, this paper builds incentive contracts under symmetric and asymmetric information situations...