Principal Agent games Flashcards
A Principal delegates a task…
To an agent
In the PA model, why does asymmetric information introduce a moral hazard?
In the Principal-Agent model, asymmetric information introduces a moral hazard, because the Principal cannot monitor the agent’s effort.
Under a moral hazard, why is contracting for effort not optimal, and what is a better method?
In the above instance, contracting for effort is not optimal as it cannot be observed, so a better method is to reward the agent with a bonus conditional on output or performance
Nothing changes if the relationship between effort and output is … and …-…
Nothing changes if the relationship between effort and output is unique and non-random
What determining factor makes things more difficult in the case of effort and output not being uniquely and explicably linked?
External factors that influence the outcome make things more difficult in this case, as Agents can sometimes use the external factor, such as adverse weather conditions, as an excuse for their poor results.
What is an example of the weather moral hazard being used by an agent?
An example of this moral hazard being used by an agent is a worker blaming the poor weather for their low level of produce on a farm on a given day, when in fact they chose to slack off and exert low effort anyway.
Why does the viability of a franchise solution depend on the farmer’s risk aversion?
The farmer’s payoffs will be very volatile due to weather conditions and other factors, so the farmer will be more reluctant to take on that risk. So, the owner will only be able to charge a lower franchise fee and earn sub optimal revenue from the franchising.
A principal agent game is incentive design under: … information, … output, … risk …
- Asymmetric information
- Stochastic output
- Agent risk aversion
What is stochastic output?
Stochastic output is output that is not directly predictable or determinable by a given level of effort
What is efficiently distributed risk?
Efficiently distributed risk is when those who are more risk-loving bear a higher share of the overall risk of the contract
Why does the principal use sharecropping style contracts even though we’ve previously deemed them inefficient?
A principal may use a sharecropping style contract even though we’ve previously deemed them inefficient, because some level of risk is needed in order to reduce the issue of the moral hazard.
What are agency costs?
Agency costs are the costs associated with the welfare losses resulting from asymmetric information.
