Multi-task Principal-agent Model Research Articles

Performance Contracting in After-Sales Service Supply Chains

Performance-based contracting is reshaping service support supply chains in capital-intensive industries such as aerospace and defense. Known as “power by the hour” in the private sector and as “performance-based logistics” (PBL) in defense contracting, it aims to replace traditionally used fixed-price and cost-plus contracts to improve product availability and reduce the cost of ownership by tying a supplier's compensation to the output value of the product generated by the customer (buyer). To analyze implications of performance-based relationships, we introduce a multitask principal-agent model to support resource allocation and use it to analyze commonly observed contracts. In our model the customer (principal) faces a product availability requirement for the “uptime” of the end product. The customer then offers contracts contingent on availability to n suppliers (agents) of the key subsystems used in the product, who in turn exert cost reduction efforts and set spare-parts inventory investment levels. We show that the first-best solution can be achieved if channel members are risk neutral. When channel members are risk averse, we find that the second-best contract combines a fixed payment, a cost-sharing incentive, and a performance incentive. Furthermore, we study how these contracts evolve over the product deployment life cycle as uncertainty in support cost changes. Finally, we illustrate the application of our model to a problem based on aircraft maintenance data and show how the allocation of performance requirements and contractual terms change under various environmental assumptions.

Reimbursement schemes for hospitals, malpractice liability, and intrinsic motivation

We develop a simple multi-task principal-agent model to analyze the interplay between optimal reimbursement schemes for hospitals and liability rules (basic model). We then extend our model and assume that the hospital is intrinsically motivated to exert positive effort for quality and cost reduction. This effort, however, is biased towards quality. Moreover, the intrinsic motivation may be crowded out by monetary incentives. In such a setting, we find that a pure prospective payment system (PPS) that has become widespread in recent years can only be optimal in the unlikely case where malpractice liability holds hospitals fully responsible for expected harm. For other cases, we confirm the prejudice that PPS may lead to inefficiently low quality. Then, the traditional fee-for-service (FFS) system is superior if the intrinsic motivation is high and relatively little biased towards quality, whereas mixed systems should be chosen otherwise. Our model sheds light on why countries like the USA with a tough liability system haven been less reluctant to switch from FFS to PPS than Germany, for instance.

BOTH MARKET AND HIERARCHY: A FORMAL THEORY OF HYBRID GOVERNANCE FORMS.

Governance theories typically envision a unidimensional continuum between markets and hierarchies, ignoring true hybrids that are market-like in some ways yet hierarchy-like in others. Our theory derives hybrids from cross-task synergies in a multi-task principal-agent model.

Moral Hazard, Effort Sensitivity and Compensation in Asset-Backed Securitization

One interesting explanation for asset securitization is the managerial agency theory—where securitization of cash flows that are relatively insensitive to managerial effort reduces the noise for cash flows that are sensitive to managerial effort (Iacobucci and Winter, 2005). This paper extends this concept in several ways. First, we differentiate the effects of noise and effort sensitivity on managerial effort and compensation, underscoring the importance of a less noisy environment. We also carefully delineate the conditions under which asset securitization would improve the welfare of managers and shareholders of the originating company. Second, we relax the assumptions regarding the expected income-producing function and the income variance, and further take into consideration the change of the marginal production of income with respect to effort before and after securitization. Third, under a multitask principal-agent model framework, we explore how the relationship between managerial activities on different assets affects the incentive compensation for the manager of the originating company and the joint surplus for shareholder and manager. This is particularly relevant when entire buildings are securitized as opposed to pools of income-generating assets. Finally, we examine the role of the third-party servicer.

A MULTI-TASK PRINCIPAL-AGENT APPROACH TO ORGANIZATIONAL FORM*

This paper studies the choice of organizational forms in a multi-task principal-agent model. We compare a functional organization in which the firm is organized into functional departments such as marketing and R&D to a product-based organization in which the firm is organized into product lines. Managers' compensation can be based on noisy measures of product-line profits. Measures of a functional area's contribution to total profits are not available, however. This effect favors the product organization. However, if there are significant asymmetries between functional area contributions to organizational success and cross-product externalities within functions, organizing along functional lines may dominate the product organization. The functional organization can also dominate when a function is characterized by strong externalities while the other is not.

Fairness and Incentives in a Multi-Task Principal-Agent Model

This paper reports on a two-task principal-agent experiment in which only one task is contractible. The principal can either offer a piece-rate contract or a (voluntary) bonus to the agent. Bonus contracts strongly outperform piece-rate contracts. Many principals reward high effort on both tasks with substantial bonuses. Agents anticipate this and provide high effort on both tasks. In contrast, almost all agents with a piece-rate contract focus on the first task and disregard the second. Principals understand this and predominantly offer bonus contracts. This behavior contradicts the self-interest theory but is consistent with theories of fairness.

Central Control of Regional Budgets: Theory with Applications to Russia

Motivated by the Russian experience, this paper examines the implications of imposing central control on the budgetary activities of a subnational government. In a multi-task principal–agent model, the center cannot monitor directly the informal budgetary operations of a region, but it can exert control over a formal regional budget and impose limited costs on informal behavior. Imperfect control of subnational budgets may increase social welfare but only at the expense of higher taxation, lower output, and a strong orientation of regional policies toward rent-seeking. Imposing costs on regions may be counterproductive, particularly in the presence of corruption. J. Comp. Econ., March 2002, 30(1), pp. 51–75. Organization for Economic Cooperation and Development (OECD), 2, Rue André Pascal, 75775 Paris Cedex 16, France. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: H11, H39, H77, D83.

Incentive contracts, corporate governance, and privatization funds in Romania

This paper analyzes the governance problems of the Romanian Private Ownership Funds (POFs), critical institutions both in the privatization process and in the future ownership and control structure of the Romanian economy. Although the POFs share similar problems with mass privatization intermediaries elsewhere, the satisfactory performance of Romanian funds faces additional obstacles due to the bureaucratic character of their initial organization, the continuing involvement of the state in their governance and operation, and the complexity of the tasks that they are supposed to accomplish. The POFs are charged not only with governing companies and managing their portfolios, but with part of the task of selling the remaining state shareholdings. We review instruments of corporate governance that could potentially induce them to perform these tasks, and conclude that the standard practices are likely to be seriously deficient in the case of the Romanian POFs. One possibility which has not yet been adopted is an incentive payment scheme for POF executives. We analyze the difficulties of implementing such a scheme with a multi-task principal-agent model, and propose a practical solution to the incentive design problem. We argue that, while some such method is certainly necessary to induce the POFs to perform their assigned tasks even approximately, it is by no means sufficient to enliven the Romanian privatization process.