Ex Ante Randomization in Agency Models

Publication Type

Journal Article

Publication Date

1984

Abstract

In a principal-agent relationship, the principal tries to develop a sharing rule that both motivates the agent and shares risk. In examining the use of randomized strategies in the structuring of optimal contracts in agency settings, ex post randomization (over fee schedules following act selection by the agent) is distinguished from ex ante randomization (over fee schedules before act selection). It is shown that ex ante randomization may be efficient in both full information and private information settings where certain assumptions are made regarding preferences and the production of technology. Although additive separability and concavity of the agent's utility function, as well as concavity of the production, rule out ex post randomization, they do not preclude efficient ex ante randomized contracts in private information settings.

Discipline

Accounting

Research Areas

Financial Intermediation and Information

Publication

RAND Journal of Economics

Volume

15

Issue

2

First Page

290

Last Page

301

ISSN

0741-6261

Identifier

10.2307/2555682

Publisher

Wiley

Additional URL

https://doi.org/10.2307/2555682

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