Incentive Centered Design : Hidden Action
Some results from class: 1. When principal (P) is neutral and agent A is risk averse - fixed payment contracts. and the principal bears all the uncertainty 2. When the P is risk averse and the agent A is risk neutral then : "Sell the project to the agent". i.e. franchise contarcts. e.g. the agent pays McDonalds to own the franchise - McD gets a fixed payment and the franchise takes all the risk. However in real life both principal and agent will have some kind of risk aversion and so in real life the contract will be something between the two. The contracting timeline: 1. principal designs contract 2. agent accepts of rejects contract (IR contract - forms one variable in the lagrangian later) 3. how hard is agent going to work (Incentive Compatibility Constraint) (forms another variable for the lagrangian later) 4. Uncertainty is resolved, i.e. we have some outcome; important point to consider how do payoffs depend on the outcome of the project - design decision. 5. cont...