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We study a principal-agent model in which the (effort-dependent) realisation of output levels is ambiguous, and the agent is ambiguity averse (while the principal is ambiguity neutral). We show that introducing ambiguity aversion will lower profits if the action that the principal wants to implement is the most ambiguous one, while they may increase otherwise. Regarding the design of the optimal contract, we show that under ambiguity aversion the optimal incentive scheme may not be monotone even if a natural generalization of the monotone likelihood ratio property is satisfied, and illustrate how this fact could affect the design of contracts in an applied economic context. We also find that the individual rationality constraint need not bind in the presence of ambiguity aversion unless preferences satisfy constant absolute ambiguity aversion. [ABSTRACT FROM AUTHOR]

We consider a dynamic moral hazard model where the principal offers a series of short-run contracts. We study the optimal mix of two alternative instruments for incentive provision: a performance based wage (a 'carrot') and a termination threat (a 'stick'). At any given point in time, these instruments are substitutes in the provision of incentives. We are particularly interested in the dynamic interaction of these two instruments. Both carrot and stick are used more intensively as the agent approaches the end of his finite life. The sharing of the surplus of the relationship plays a key role: a termination threat is included in the optimal contract if and only if the agent's expected future gain from the relationship is sufficiently high, compared to the principal's expected future gain. Also, a termination threat is more likely to be optimal if output depends more on 'luck' than on effort, if the discount factor is high, or if the agent's productivity is low. The model, provided that the optimal contract includes a termination threat, essentially provides an alternative explanation for upward-sloping wage profiles even in the absence of full-commitment. [ABSTRACT FROM AUTHOR]

A production process involves a principal and two privately informed agents. Production requires coordinated decision making. It might be carried in a centralized organization or through delegated contracting in a hierarchical structure. We compare the performance of different organizational structures when renegotiation of initial contracts is possible. We show that delegated contracting always dominates centralization if the downstream contract between the agents is observable. Contracting (resp. control) should be delegated to the agent with the least (resp. most) important information. If downstream contracts are not observable, we obtain a tradeoff between centralization and delegation. [ABSTRACT FROM AUTHOR]

This article studies the optimal design of scoring auctions used in public and private procurement. In this auction, each supplier's offer consists of both price and quality, and a supplier whose offer achieves the highest score wins. The environment we consider has the feature that quality is multidimensional, and the cost complementarity or cost substitutability among quality attributes significantly affects the form of a scoring rule which implements the buyer's optimal mechanism. Our results show that the optimal scoring rule can be additively separable in the quality attributes if the degree of cost substitutability between the attributes is nonpositive, and it cannot be additively separable if the degree is sufficiently high. An example shows how to compute the buyer's loss from using an additively separable scoring rule. We also investigate how the optimal scoring rule depends on the buyer's weight parameter on suppliers' profits and the number of suppliers. [ABSTRACT FROM AUTHOR]

We consider multiple-principal multiple-agent models of moral hazard: principals compete through mechanisms in the presence of agents who take unobservable actions. In this context, we provide a rationale for restricting principals to make use of simple mechanisms, which correspond to direct mechanisms in the standard framework of Myerson (J Math Econ 10:67-81, ). Our results complement those of Han (J Econ Theory 137(1):610-626, ) who analyzes a complete information setting where agents' actions are fully contractible. [ABSTRACT FROM AUTHOR]

We extend the conditions for incentive compatibility in mechanism design problems to a more general structure of preferences than that found in the literature, for the case where type is one-dimensional but the outcome function becomes multidimensional. This is so, at least, as long as preferences can be represented by means of sub-utility functions, it is adopted a weak single-crossing property and direct mechanisms turn out to be differentiable. When direct mechanisms are not differentiable, local incentive conditions still remain fully incentive compatible, provided utility is weakly separable in the outcome function, or else, it exhibits linearity in the type. [ABSTRACT FROM AUTHOR]

This paper describes a mechanism designed to induce commercial banks to increase their willingness to extend loans in an economic environment characterized by increased uncertainty and diminished expectations. This mechanism is a new tool for the conduct of monetary policy to combat recessions. [ABSTRACT FROM AUTHOR]

A collection of large traders holds heterogeneous prior beliefs regarding market fundamentals. This gives them a motive to engage in speculative trade with respect to market prices. Rather than assuming a particular institution or market for speculative trade, we take a mechanism-design approach by attempting to characterize the mechanism that maximizes the traders’ gains from speculative trade, subject to the incentive constraints that result from the traders’ ability to manipulate market prices. Within a stylized market model, we show that this mechanism affects price volatility without destroying ex-post efficient allocations. We also characterize the implementability of optimal speculative trade when the traders’ prior beliefs are private information. [ABSTRACT FROM AUTHOR]