Open AccessPayoff implications of incentive contracting
Author(s) -
Garrett Daniel F.
Publication year - 2021
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te4293
Subject(s) - incentive , stochastic game , principal (computer security) , microeconomics , context (archaeology) , economic rent , principal–agent problem , agency (philosophy) , economics , ignorance , mathematical economics , computer science , computer security , finance , paleontology , corporate governance , philosophy , epistemology , biology
In the context of a canonical agency model, we study the payoff implications of introducing optimally structured incentives. We do so from the perspective of an analyst who does not know the agent's preferences for responding to incentives, but does know that the principal knows them. We provide, in particular, tight bounds on the principal's expected benefit from optimal incentive contracting across feasible values of the agent's expected rents. We thus show how economically relevant predictions can be made robustly given ignorance of a key primitive.