Working Paper: CEPR ID: DP6452
Authors: Luigi Siciliani
Abstract: We present a model of optimal contracting between a purchaser (a principal) and a provider (an agent). We assume that: a) providers differ in efficiency and there are two types of provider; b) efficiency is private information (adverse selection); c) providers are partially altruistic or intrinsically motivated; d) they have limited liability. Four types of separating equilibrium can emerge, depending on the degree of altruism, characterised as very low, low, high and very high. i) For very low altruism the quantity of the efficient and inefficient types is distorted upwards and downwards respectively; the efficient type makes a positive profit. ii) For low altruism the quantity of the efficient and inefficient types is also distorted respectively upwards and downwards, but profits are zero for both types. iii) For high altruism the first best is attained: no distortions on quantities and zero profits. iv) For very high altruism the quantity of the inefficient type is distorted upwards, and the quantity of the efficient type is distorted either upwards or downwards. The inefficient type might have a positive profit. The quantity of the efficient type is higher than that of the inefficient type in all four possible equilibria. The transfer for the efficient type can be higher or lower than the inefficient one, unless altruism tends to zero in which case the transfer for the efficient type is higher. The utility of the efficient type is higher than that of the inefficient one when altruism is very low, low or high, though not necessarily when altruism is very high.
Keywords: Altruism; Motivated Agents; Performance
JEL Codes: D82; I11; I18; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| very low altruism (D64) | upward distortion of efficient type's quantity (C51) |
| very low altruism (D64) | downward distortion of inefficient type's quantity (D39) |
| very low altruism (D64) | positive profits for efficient provider (D61) |
| low altruism (D64) | distortion of both types' quantities (C46) |
| low altruism (D64) | zero profits for both types (L19) |
| high altruism (D64) | first-best outcome (H21) |
| high altruism (D64) | no distortions (H21) |
| high altruism (D64) | zero profits (D41) |
| very high altruism (D64) | upward distortion of inefficient type's quantity (D39) |
| very high altruism (D64) | distortion of efficient type's quantity either way (D39) |
| very high altruism (D64) | potential profit for inefficient provider (D61) |