Abstract
The hidden-action model captures a fundamental problem of principal-agent theory and provides an optimal sharing rule when only the outcome but not the effort can be observed (Holmström in Bell J Econ 10(1):74, 1979). However, the hidden-action model builds on various explicit and also implicit assumptions about the information of the contracting parties. This paper relaxes key assumptions regarding the availability of information included in the hidden-action model in order to study whether and, if so, how fast the optimal sharing rule is achieved and how this is affected by the various types of information employed in the principal-agent relation. Our analysis particularly focuses on information about the environment and about feasible actions for the agent. We follow an approach to transfer closed-form mathematical models into agent-based computational models and show that the extent of information about feasible options to carry out a task only has an impact on performance if decision makers are well informed about the environment, and that the decision whether to perform exploration or exploitation when searching for new feasible options only affects performance in specific situations. Having good information about the environment, on the contrary, appears to be crucial in almost all situations.
Highlights
This paper focuses on the hidden-action model introduced in Holmström (1979): An individual delegates some authority in order to act in her name to another individual
The first part of the analysis provides insights into the effects of the sophistication of the information systems employed within the contractual relationship between the principal and the agent on the level of performance obtained
We can see that the contours are no longer nearly horizontal, but their slope increases with the quality of the information provided by the principal’s and the agent’s information systems for external information
Summary
This paper focuses on the hidden-action model introduced in Holmström (1979) ( referred to as standard hidden-action model): An individual (the principal) delegates some authority in order to act in her name (i.e., to exert productive effort) to another individual (the agent). This relation is specified in a contract which defines what the agent has to do, in terms of a task which is delegated from the principal to the agent, and how the resulting outcome is shared between the principal and the agent (Lambert 2001; Eisenhardt 1989). There is, empirical evidence that the assumptions incorporated in the standard hidden-action model are not perfectly in line with human capabilities and human behavior, when studied in the context of organizations (e.g., Perrow 1986; Eisenhardt 1989; Hendry 2002)
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