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Countervailing incentives in agency problems. (English) Zbl 0682.90015
Summary: We analyze countervailing incentives in the agency problem. Countervailing incentives exist when the agent has an incentive to understate his private information for some of its realizations, and to overstate it for others. When countervailing incentives arise, pooling generally characterizes the equilibrium contract. Furthermore, performance is distorted both above and below efficient levels. In addition, the agent’s rents generally increase with the realization of his private information over some ranges, and decrease over other ranges. We demonstrate that the creation of countervailing incentives can enhance aggregage welfare.

MSC:
91B24 Microeconomic theory (price theory and economic markets)
91A40 Other game-theoretic models
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