Agency Contracts under Maximum-Entropy

Autor: Oscar Gutiérrez, Vicente Salas-Fumás
Jazyk: angličtina
Rok vydání: 2021
Předmět:
Zdroj: Entropy, Vol 23, Iss 8, p 957 (2021)
Druh dokumentu: article
ISSN: 23080957
1099-4300
DOI: 10.3390/e23080957
Popis: This article proposes the application of the maximum-entropy principle (MEP) to agency contracting (where a principal hires an agent to make decisions on their behalf) in situations where the principal and agent only have partial knowledge on the probability distribution of the output conditioned on the agent’s actions. The paper characterizes the second-best agency contract from a maximum entropy distribution (MED) obtained from applying the MEP to the agency situation consistently with the information available. We show that, with the minimum shared information about the output distribution for the agency relationship to take place, the second-best compensation contract is (a monotone transformation of) an increasing affine function of output. With additional information on the output distribution, the second-best optimal contracts can be more complex. The second-best contracts obtained theoretically from the MEP cover many compensation schemes observed in real agency relationships.
Databáze: Directory of Open Access Journals
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