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This comprehensive research review recaps major literary
contributions to the economic theory of incentives. These carefully
selected papers, both classic and contemporary, analyse collective
decision problems in the context of asymmetric information, moral
hazard and incomplete contracting. This review is an essential tool
for any serious scholar and student in the field.
Economics has much to do with incentives--not least, incentives
to work hard, to produce quality products, to study, to invest, and
to save. Although Adam Smith amply confirmed this more than two
hundred years ago in his analysis of sharecropping contracts, only
in recent decades has a theory begun to emerge to place the topic
at the heart of economic thinking. In this book, Jean-Jacques
Laffont and David Martimort present the most thorough yet
accessible introduction to incentives theory to date. Central to
this theory is a simple question as pivotal to modern-day
management as it is to economics research: What makes people act in
a particular way in an economic or business situation? In seeking
an answer, the authors provide the methodological tools to design
institutions that can ensure good incentives for economic
agents.
This book focuses on the principal-agent model, the "simple"
situation where a principal, or company, delegates a task to a
single agent through a contract--the essence of management and
contract theory. How does the owner or manager of a firm align the
objectives of its various members to maximize profits? Following a
brief historical overview showing how the problem of incentives has
come to the fore in the past two centuries, the authors devote the
bulk of their work to exploring principal-agent models and various
extensions thereof in light of three types of information problems:
adverse selection, moral hazard, and non-verifiability. Offering an
unprecedented look at a subject vital to industrial organization,
labor economics, and behavioral economics, this book is set to
become the definitive resource for students, researchers, and
others who might find themselves pondering what contracts, and the
incentives they embody, are really all about.
Lobbying competition is viewed as a delegated common agency game
under moral hazard. Several interest groups try to influence a
policy-maker who exerts effort to increase the probability that a
reform be implemented. With no restriction on the space of
contribution schedules, all equilibria perfectly reflect the
principals' preferences over alternatives. As a result, lobbying
competition reaches efficiency. Unfortunately, such equilibria
require that the policy-maker pays an interest group when the
latter is hurt by the reform. When payments remain non-negative,
inducing effort requires leaving a moral hazard rent to the
decision maker. Contributions schedules no longer reflect the
principals' preferences, and the unique equilibrium is inefficient.
Free-riding across congruent groups arises and the set of groups
active at equilibrium is endogenously derived. Allocative
efficiency and redistribution of the aggregate surplus is linked
altogether and both depend on the set of active principals, as well
as on the group size.
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