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Efficiency in Hierarchies: Implementing the First-Best Solution by Sequential Actions.

Abstract:

A model of a firm with one principal and two agents is considered. The actions of the agents are not observed by the principal; hence there is moral hazard. It is shown that when the agents act sequentially -- that is, agent 2 takes his action conditional upon agent 1's choice -- the first-best actions can be implemented by a suitable choice of the incentive schemes given to the two agents. The result relies both on the sequential nature of the game and on the particular specification of the ...

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Journal:
RAND Journal of Economics
Volume:
20
Issue:
4
Publication date:
1989-01-01
URN:
uuid:0de44c4f-622d-40a2-990f-00307a24c3e3
Local pid:
oai:economics.ouls.ox.ac.uk:14541
Language:
English

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