Stopping Agents from 'Cheating'

John Moore, Ching-to Ma, Stephen Turnbull

Research output: Contribution to journalArticlepeer-review

Abstract

When a principal hires two (or more) agents to work in a correlated environment, each agent's reward will depend on the other's performance. Unfortunately, with just the usual optimal (incentive-constrained) contracts being offered, the agents strictly prefer to play equilibrium strategies other than those desired by the principal; they “cheat.” However, the principal can use a more subtle contractual mechanism to stop them from cheating at no extra cost. This mechanism uses one agent to police the other, and exploits certain properties of the optimal contracts.
Original languageEnglish
Pages (from-to)355-372
Number of pages18
JournalJournal of Economic Theory
Volume46
Issue number2
Publication statusPublished - Dec 1988

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