Monitoring Team Members: Information Waste and the Transparency Trap

This article studies moral hazard in teams where workers' wages depend on two types of performance measures: objective team output and subjective evaluations. The evaluations include both self‐ and peer evaluations. I find that when evaluations become less subjective, workers' wages should be more sensitive not only to their evaluations but also to the team's output. I also show that subjective evaluations should be used in relative terms only when the degree of subjectivity is not too high. The results also associate the introduction of a budget breaker with the level of subjectivity within organizations.

Most political and economic theorists point to moral hazard in teams as the main obstacle to lobbies’ collective action. In this paper, we address this important issue with a coalition-formation game. In the process of doing so, we characterize equilibrium lobby structures both in the absence and in the presence of moral hazard. Three notable results emerge from such an exercise: (1) an equilibrium lobby structure exists under both specifications of the model, (2) moral hazard in teams may raise large groups’ equilibrium lobby size, and (3) it may also raise the level of collective action of large groups with low organizational costs.

This paper studies moral hazard in teams using a model where efforts are promoted via the combination of profit shares and relational contracts. The focus is on how these two forms of incentives interact. According to the degree of effort observability and the importance of future interaction, the optimal allocation of profit shares can range from a wide dispersion across players to a full concentration of shares in the hands of a single player. When shares are sufficiently concentrated, the corresponding residual claimant can also adopt the role of administering all relational contracts, therefore serving as an endogenously chosen principal.

Holmstrom (Bell J Econ 13:324–340, 1982) argues that a principal is required to restrain moral hazard in a team: wasting output in certain states is required to enforce efficient effort, and the principal is a commitment device for the waste. Under competition in commodity and team-formation markets, I extend his model à la Prescott and Townsend (Econometrica 52(1):21–45, 1984) to show that competitive contracts can exploit the futures market to transfer output across states instead of wasting it. Thus, the futures market takes the place of a principal as a commitment device. Exploiting the duality of linear programming, I characterize the market environment and the contractual agreements for incentive-constrained efficiency.

This paper addresses the classic free riding question in a two-person managerial team Unlike pure moral hazard models, we assume that individual entrepreneurial abilitie also affects team output. Using a two-period model, we show that in an Alchian-Demsetz firm, even in a finite period game setting, effort levels of both team members higher than commonly perceived can be achieved. We argue that this is due to partial mutual observability between the team members. We then show that the existence of a self-enforcing mechanism in managerial teams alleviates free riding, and this is one reason why team structures persist. Comparison with classic capitalistic firms where group performance evaluation is abandoned yields the result that the optimal incentive piece rate should be lower in a team. This may explain the Jensen-Murphy puzzle.

This paper investigates the role of common-knowledge in the principal-agent model under uncertainty. We treat the problem: How epistemic conditions will be able to settle a moral hazard in team in the principal-agent model under uncertainty. We shall propose a resolution programme for the moral hazard in the principal-agent model by common-knowledge. Let us assume that the agents have the knowledge structure induced from a binary relation associated with the multi-modal logic S5n or S4n. We show that the moral hazard can be resolved in the principal-agent model under uncertainty if the agents commonly know all their own costs.

This paper investigates the role of communication among the principal and agents under uncertainty. We treat the problem: How epistemic conditions of communication will be able to settle a moral hazard in team in the principal-agent model under uncertainty. We shall propose a communication process to resolve the moral hazard in the principal-agent model by communication. We assume that the agents have the knowledge structure induced from a binary relation associated with the multi-modal logic bf S4n. We show that the moral hazard can be resolved if the principal and each agent communicate their expected marginal costs according to the acyclic communication graph.

It has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget-balancing constraint, and that this facilitates the design of contracts that can sustain the Pareto optimum as a (perfect) Nash equilibrium. This note offers an explanation for why the use of budget-breaking schemes is not so widespread as that of active monitoring, despite the fact that such schemes would save the resources expended on supervision. The note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party, which could render the proposed equilibrium incredible.

Collective performance-based trading can be achieved by pairing a team contract with an auction to determine team membership. The auction effectively overcomes adverse selection, and the team contract reduces the incentive to free-ride associated with moral hazard in teams.

Experience and credence goods Experience characteristics and moral hazard in team sports Credence characteristics and strategic human capital selection Experience goods, tournaments, and oligopolistic markets

Verifiability and Group Formation in Markets

Generalized Arrow-Pratt Theory

'Is That a Gun in Your Pocket... ?' Advertising and Evaluation

This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.

Comparative Riskiness of Random Vector Outcomes