Working Paper: CEPR ID: DP4702
Authors: Marco Battaglini
Abstract: Consider Holmström.s moral hazard in teams problem when there are n agents, each agent i has a a(i)-dimensional strategy space and output can be m-dimensional. We show that a compensation mechanism that satisfies budget balance, limited liability and implements an efficient allocation generically exists if and only if Sum_a(i)/(n-1)< m. When this condition is satisfied, the optimal mechanism discourages collusive behavior and, under a weak condition, filters out inefficient equilibria.
Keywords: incentives; moral hazard; teams; theory of the firm
JEL Codes: D23; D82; J33; L23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sum of the dimensions of agents' strategies (Σai) (C73) | efficiency in Nash equilibrium (C72) |
| sum of the dimensions of agents' strategies (Σai) exceeds the dimensionality of output (m) (C73) | impossibility of efficiency in Nash equilibrium (D59) |
| sum of the dimensions of agents' strategies (Σai) ≤ dimensionality of output (m) (C73) | establishment of efficient compensation mechanism (J33) |
| efficient compensation mechanism (J33) | satisfies budget balance and limited liability (G33) |
| efficient compensation mechanism (J33) | unique strong Nash equilibrium (C72) |
| presence of stochastic perturbations (C69) | complicate identification of agents' contributions (D82) |
| communication mechanism (L96) | manage uncertainties while maintaining budget balance (H12) |