Multiple principal-agent relationships model based on fairness preference

Abstract

This paper aims to overcome the defects of the traditional Holmstrom-Milgrom (HM) principal-agent theory, namely the limitation of rational agent hypothesis and the overemphasis on the single principal-agent relationship. To this end, the fairness preference was introduced to a new multiple principal-agent relationships model, and the rational agent hypothesis in the traditional theory was modified. The effect of fairness preference on the model was discussed under both information symmetry and information asymmetry. The discussion shows that fairness preference can significantly improve the effort level and income of all entities. In other words, the agents will work harder if the principal offers more incentives, such as increasing the output sharing ratio. However, the increase of risk aversion always suppresses the incentive effect of output sharing. In addition, the fairness preference also enhances the efficiency of principal-agent relationships. The research findings shed new light on the design of incentive mechanism for supply chains involving multiple principal-agent relationships.