Asymmetric Information
... Buyers would have market choice of purchasing either reliable cars or lemons Without market ability to quality discriminate, some buyers may by chance purchase a reliable car But these may not be buyers with highest willingness-to-pay • Failure of market to allocate commodities based on willingn ...
... Buyers would have market choice of purchasing either reliable cars or lemons Without market ability to quality discriminate, some buyers may by chance purchase a reliable car But these may not be buyers with highest willingness-to-pay • Failure of market to allocate commodities based on willingn ...
Document
... MR=240-4Q (of the consumers) and MC=0 (for the producer) so the optimal quantity is 60 and the price is 120. The profits would be 7200. Q2. A worker has preferences given by u(w,e) = w - .5e2 where w denotes wealth and e denotes effort. This worker has an outside offer that will earn her a utility o ...
... MR=240-4Q (of the consumers) and MC=0 (for the producer) so the optimal quantity is 60 and the price is 120. The profits would be 7200. Q2. A worker has preferences given by u(w,e) = w - .5e2 where w denotes wealth and e denotes effort. This worker has an outside offer that will earn her a utility o ...
full powerpoint presentation - Iowa State University Department of
... Reward the employee for only the amount of output produced A problem if there is uncertainty – i.e. if wage is fixed to performance and there is a bad year in chemical sales Could potentially turn off customers – i.e. annoying sales personnel ...
... Reward the employee for only the amount of output produced A problem if there is uncertainty – i.e. if wage is fixed to performance and there is a bad year in chemical sales Could potentially turn off customers – i.e. annoying sales personnel ...
some applications of principal agent model
... Key words: agency theory, public choice, moral hazard, incentives. Introduction Relationship between principal and agent comes from long tradition of Common Law, where employment contract based on agency is on of the most important types of employment. This contract binds two sides: agent (agents) w ...
... Key words: agency theory, public choice, moral hazard, incentives. Introduction Relationship between principal and agent comes from long tradition of Common Law, where employment contract based on agency is on of the most important types of employment. This contract binds two sides: agent (agents) w ...
Homework 2
... are interested in purchasing the rights. Given the original winner can choose any second–stage mechanism, how should they bid in the original auction? How would revenue change if the auctioneer sold to all M + N bidders at once? 2. (a) There is one bidder with value v1 ∼ U [a, a + 1], where a ≥ 0. W ...
... are interested in purchasing the rights. Given the original winner can choose any second–stage mechanism, how should they bid in the original auction? How would revenue change if the auctioneer sold to all M + N bidders at once? 2. (a) There is one bidder with value v1 ∼ U [a, a + 1], where a ≥ 0. W ...
Principal–agent problem
The principal–agent problem (also known as agency dilemma or theory of agency) occurs when one person or entity (the ""agent"") is able to make decisions on behalf of, or that impact, another person or entity: the ""principal"". The dilemma exists because sometimes the agent is motivated to act in his own best interests rather than those of the principal. The agent-principal relationship is a useful analytic tool in political science and economics, but may also apply to other areas.Common examples of this relationship include corporate management (agent) and shareholders (principal), or politicians (agent) and voters (principal). For another example, consider a dental patient (the principal) wondering whether his dentist (the agent) is recommending expensive treatment because it is truly necessary for the patient's dental health, or because it will generate income for the dentist. In fact the problem potentially arises in almost any context where one party is being paid by another to do something, whether in formal employment or a negotiated deal such as paying for household jobs or car repairs.The problem arises where the two parties have different interests and asymmetric information (the agent having more information), such that the principal cannot directly ensure that the agent is always acting in its (the principal's) best interests, particularly when activities that are useful to the principal are costly to the agent, and where elements of what the agent does are costly for the principal to observe. Moral hazard and conflict of interest may arise. Indeed, the principal may be sufficiently concerned at the possibility of being exploited by the agent that he chooses not to enter into a transaction at all, when that deal would have actually been in both parties' best interests: a suboptimal outcome that lowers welfare overall. The deviation from the principal's interest by the agent is called ""agency costs"".Various mechanisms may be used to align the interests of the agent with those of the principal. In employment, employers (principal) may use piece rates/commissions, profit sharing, efficiency wages, performance measurement (including financial statements), the agent posting a bond, or the threat of termination of employment.