Gaming and strategic opacity in incentive provision
It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments in a two-task moral hazard model in which...
| Main Authors: | , , |
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| Format: | Working paper |
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University of Oxford
2013
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| _version_ | 1826305159959937024 |
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| author | Meyer, M Ederer, F Holden, R |
| author_facet | Meyer, M Ederer, F Holden, R |
| author_sort | Meyer, M |
| collection | OXFORD |
| description | It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments in a two-task moral hazard model in which the agent is privately informed about which task is less costly for him. We examine a simple class of incentive schemes that are "opaque" in that they make the agent uncertain ex ante about the incentive coefficients in the linear payment rule. Relative to transparent menus of linear contracts, these opaque schemes induce more balanced efforts, but they also impose more risk on the agent per unit of aggregate effort induced. We identify specific settings in which optimally designed opaque schemes not only strictly dominate the best transparent menu but also eliminate the efficiency losses from the agent's hidden information. Opaque schemes are more likely to be preferred to transparent ones when (i) the agent's privately known preference between the tasks is weak; (ii) the agent's risk aversion is significant; (iii) efforts on the tasks are highly complementary for the principal; or (iv) the errors in measuring performance have large correlation or small variance. Revised April 2018 |
| first_indexed | 2024-03-07T06:28:39Z |
| format | Working paper |
| id | oxford-uuid:f530bca6-4bfb-4454-ac33-b8fb5e369e55 |
| institution | University of Oxford |
| last_indexed | 2024-03-07T06:28:39Z |
| publishDate | 2013 |
| publisher | University of Oxford |
| record_format | dspace |
| spelling | oxford-uuid:f530bca6-4bfb-4454-ac33-b8fb5e369e552022-03-27T12:25:32ZGaming and strategic opacity in incentive provisionWorking paperhttp://purl.org/coar/resource_type/c_8042uuid:f530bca6-4bfb-4454-ac33-b8fb5e369e55Bulk import via SwordSymplectic ElementsUniversity of Oxford2013Meyer, MEderer, FHolden, RIt is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments in a two-task moral hazard model in which the agent is privately informed about which task is less costly for him. We examine a simple class of incentive schemes that are "opaque" in that they make the agent uncertain ex ante about the incentive coefficients in the linear payment rule. Relative to transparent menus of linear contracts, these opaque schemes induce more balanced efforts, but they also impose more risk on the agent per unit of aggregate effort induced. We identify specific settings in which optimally designed opaque schemes not only strictly dominate the best transparent menu but also eliminate the efficiency losses from the agent's hidden information. Opaque schemes are more likely to be preferred to transparent ones when (i) the agent's privately known preference between the tasks is weak; (ii) the agent's risk aversion is significant; (iii) efforts on the tasks are highly complementary for the principal; or (iv) the errors in measuring performance have large correlation or small variance. Revised April 2018 |
| spellingShingle | Meyer, M Ederer, F Holden, R Gaming and strategic opacity in incentive provision |
| title | Gaming and strategic opacity in incentive provision |
| title_full | Gaming and strategic opacity in incentive provision |
| title_fullStr | Gaming and strategic opacity in incentive provision |
| title_full_unstemmed | Gaming and strategic opacity in incentive provision |
| title_short | Gaming and strategic opacity in incentive provision |
| title_sort | gaming and strategic opacity in incentive provision |
| work_keys_str_mv | AT meyerm gamingandstrategicopacityinincentiveprovision AT edererf gamingandstrategicopacityinincentiveprovision AT holdenr gamingandstrategicopacityinincentiveprovision |