Ex Ante Randomization in Agency Models

• Main Authors: KWON, Young Koan, Fellingham, J., Newman, P.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 1984
• Subjects: Accounting
• Online Access: https://ink.library.smu.edu.sg/soa_research/730; http://www.jstor.org/stable/2555682
• Institution: Singapore Management University

In a principal-agent relationship, the principal tries to develop a sharing rule that both motivates the agent and shares risk. In examining the use of randomized strategies in the structuring of optimal contracts in agency settings, ex post randomization (over fee schedules following act selection by the agent) is distinguished from ex ante randomization (over fee schedules before act selection). It is shown that ex ante randomization may be efficient in both full information and private information settings where certain assumptions are made regarding preferences and the production of technology. Although additive separability and concavity of the agent's utility function, as well as concavity of the production, rule out ex post randomization, they do not preclude efficient ex ante randomized contracts in private information settings.