Principal-Agent Problems and Experimentation

Abstract

Chapter 1 studies contracts which provide incentives for information acquisition that is costly for an agent and unobservable to a principal. We show that each Pareto optimal contract pays a fraction of output, a state-dependent transfer, and a decision-dependent transfer. The fraction of output is increasing in the set of experiments available to the agent, the state-dependent transfer indexes contract payments to differences in output between states, and the decision-dependent transfer punishes decisions likely to make liability limits bind. Chapter 2 studies the effect of capacity constraints capping maximum agent effort in principal-agent problems. We show that the form of optimal contracts after introducing a capacity constraint can be obtained from the form of the original optimal contracts by replacing output with a fraction of output and we show that this fraction is increasing in the agent's capacity. One implication of this result is that if before introducing a capacity constraint all optimal contracts result in the principal receiving a debt, then optimal contracts after introducing a capacity constraint result in the principal receiving a debt and a fraction of equity. Chapter 3 studies the relationship between core and competitive equilibira in economies that consist of a continuum of agents and some large agents. We construct a class of these economies in which the core and competitive allocations do not coincide.