Incentive provision with multiple tasks and multiple agents

Abstract

One of the central results of economics is that incentives matter. Contract theory, the branch of economics that is concerned with the optimal design of incentives, has seen a considerable growth in the last decades. In the most simple model, a principal wants to delegate a task he cannot conduct himself to an agent who incurs a disutility from working. Hence, the incentives of principal and agent are not aligned, and the principal has to design an appropriate incentive scheme which motivates the agent to perform the task at the lowest cost. Contracting frictions arise when the effort of the agent is not observable by the principal or when she does not know whether the agent is highly skilled or lacking ability. Early studies on incentive provision have covered problems where the principal delegates one task to one agent. However, most real-world contracting problems consist of more than one task to be carried out, and principals typically hire more than one agent. In such situations, the interactions between the agents and between the incentives for the individual tasks have to be taken into account. Since the seminal paper by Holmström and Milgrom (1991), such problems have become of great interest to the theory of incentives. This thesis consists of four self-contained chapters concerning problems where there are multiple tasks to be delegated. One study is theoretical, two combine theory and evidence from the laboratory, and one is experimental. Testing the predictions of contract-theoretical models empirically is subject to difficulties due to the non-observability of the agents' efforts or their types. Hence, the controlled environment of laboratory experiments is very useful as a first step for testing the empirical relevance of the theoretical models. In Chapter 2, we analyze a theoretical model where an uninformed decision-maker has to make a decision based on evidence in favor and against a proposal. The information is gathered by two biased groups, one of which searches for favorable evidence while the other searches for evidence against the proposal. Chapter 3 theoretically and experimentally considers a problem where a principal has to delegate two tasks that are in direct conflict with each other. In the theoretical and experimental study presented in Chapter 4, a government wants to provide a public service. It can delegate the two tasks of building and subsequently operating the facility either to a public-private partnership or to two independent private contractors. In our experimental studies, social preferences in the form of fairness and reciprocity influence our results. While social preferences have received considerable attention in experimental economics, there are only a few studies on the effect of cognitive abilities. We report on a short experimental study in Chapter 5 on the relationship between cognitive abilities and behavioral biases.