[go: up one dir, main page]

Skip to main content
Log in

The principal-agent problem with adaptive players

  • Published:
Computational & Mathematical Organization Theory Aims and scope Submit manuscript

Abstract

In this study we show predictions made by the standard principal-agent theory may not hold when knowlege assumptions are relaxed. Conventional principal-agent models assume players are completely rational: they know their own and other player's utilities and probabilities of all states of nature. In reality, players must make decisions without such knowledge.

We define a simple version of the principal-agent game and examine it using object-oriented computer simulation. Player learning is modeled with a statistical learning model. Our results show that even this simple game combined with standard learning assumptions results in complex behavior. Expectations of both the principal and the agents are crucial in determining the system outcomes. Expectations and lack of prior knowledge make it possible for the principal to converge on suboptimal behavior or not converge on a consistent behavior at all. The same attributes in the agents make it possible for the principal to drive expectations down and thus get higher effort for lower reward.

This study contributes a more robust understanding of the principal-agent model and its application to incentive design.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Subscribe and save

Springer+ Basic
$34.99 /Month
  • Get 10 units per month
  • Download Article/Chapter or eBook
  • 1 Unit = 1 Article or 1 Chapter
  • Cancel anytime
Subscribe now

Buy Now

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

Explore related subjects

Discover the latest articles, news and stories from top researchers in related subjects.

Bibliography

  • Arthur, W. Brian (1988), “Self-reinforcing mechanisms in economics,” in Anderson, Philip, Kenneth Arrow, and David Pines (eds.),The Economy as an Evolving Complex System, Redwood City, CA: Addison-Wesley.

    Google Scholar 

  • Axelrod, Robert (1984),The Evolution of Cooperation, New York: Basic Books.

    Google Scholar 

  • Baiman, Stanley (1982), “Agency research in managerial accounting: A survey,” inAccounting Control Systems: A Behavioral and Technical Integration, ed. Jan Bell, NY: Markus Wiener Publishing, Inc.

    Google Scholar 

  • Basu, A.K., R. Lal, V. Srinivasan, and R. Staelin (1985), “Salesforce compensation plans: An agency theoretic perspective,”Marketing Science, vol. 4, pp. 267–291.

    Google Scholar 

  • Baumol, William and Richard Quandt (1964), “Rules of thumb and optimally imperfect decision,”American Economic Review, vol. 54, pp. 23–46.

    Google Scholar 

  • Bull, Clive, Andrew Schotter, and Keith Weigelt (1987), “Tournaments and piece rates: An experimental study,”Journal of Political Economy, vol. 95, pp. 1–33.

    Google Scholar 

  • Bush, Robert, and Frederick Mosteller (1955),Stochastic Models for Learning, New York: John Wiley.

    Google Scholar 

  • Carley, Kathleen (1994), “Sociology: Computational organization theory,”Social Science Computer Review, vol. 12, pp. 611–624.

    Google Scholar 

  • Carley, Kathleen (1992), “Organizational learning and personnel turnover,”Organization Science, vol. 3, pp. 20–46.

    Google Scholar 

  • Carley, Kathleen and Michael Prietula, eds. (1994),Computational Organization Theory, Hillsdale, NJ: Lawrence Erlbaum Associates.

    Google Scholar 

  • Chandler, Alfred (1962),Strategy and Structure: Chapters in the History of the Industrial Enterprise, Cambridge, MA: MIT Press.

    Google Scholar 

  • Chiappori, Pierre-Andre, Ines Macho, Patrick Rey, and Bernard Salanie (1994), “Repeated moral hazard: The role of memory, committment, and the access to credit markets,”European Economic Review, vol. 38, pp. 1527–1553.

    Google Scholar 

  • Cohen, Michael, and James March (1974),Leadership and Ambiguity: The American College President, New York: McGraw-Hill.

    Google Scholar 

  • Cohen, Michael, James March, and Johan Olsen (1972), “A garbage can model of organizational choice,”Administrative Science Quarterly, vol. 17, pp. 1–25.

    Google Scholar 

  • Coleman, James (1990),Foundations of Social Theory, Cambridge, MA: Belknap Press of Harvard University.

    Google Scholar 

  • Cross, John (1983),A Theory of Adaptive Economic Behavior, Cambridge, UK: Cambridge University Press.

    Google Scholar 

  • Cyert and March (1963),A Behavioral Theory of the Firm, Englewood Cliffs, NJ: Prentice-Hall, Inc.

    Google Scholar 

  • Donaldson, Lex (1990), “The ethereal hand: Organizational economics and management theory,”Academy of Management Review, vol. 15, pp. 369–381.

    Google Scholar 

  • Eisenhardt, Kathleen (1989), “Agency theory: An assessment and review,”Academy of Management Review, vol. 14, pp. 57–74.

    Google Scholar 

  • Eisenhardt, Kathleen (1985), “Control: Organizational and economic approaches,”Management Science, vol. 31, pp. 134–149.

    Google Scholar 

  • Ellison, Glen and Drew Fudenberg (1993), “Rules of thumb for social learning,”Journal of Political Economy, vol. 101.

  • Estes, William (1950), “Toward a statistical theory of learning,”Psychological Review, vol. 57, pp. 94–107.

    Google Scholar 

  • Forrest, Stephanie (1990), “Emergent computation: Self-organizing, collective, and cooperative phenomena in natural and artificial computing networks,”Physica D, vol. 42, pp. 1–11.

    Google Scholar 

  • Green, Jerry and Nancy Stokey (1983), “A comparison of tournaments and contracts,”Journal of Political Economy, vol. 91, pp. 349–364.

    Google Scholar 

  • Gurbaxani, Vijay, and Seungjin Whang (1991), “The impact of information systems on organizations and markets,”Communications of the ACM, vol. 34, pp. 59–73.

    Google Scholar 

  • Healy, Alice, Shephen Kosslyn, and Richard Shiffrin, eds. (1992),From Learning Theory to Connectionist Theory, vol. 1, Hillsdale, NJ: L. Erlbaum.

    Google Scholar 

  • Harris, Milton and Artur Raviv (1979), “Optimal incentive contracts with imperfect information,”Journal of Economic Theory, vol. 20, pp. 231–259.

    Google Scholar 

  • Hirsch, Paul, Stuart Michaels, and Ray Friedman (1987), “Dirty hands' versus ‘clean models’: Is sociology in danger of being seduced by economics?”Theory and Society, vol. 16, pp. 317–336.

    Google Scholar 

  • Holmstrom, Bengt (1982), “Moral hazard in teams,”Bell Journal of Economics, vol. 13, pp. 324–340.

    Google Scholar 

  • Holmstrom, Bengt (1979), “Moral hazard and observability,”Bell Journal of Economics, vol. 10, pp. 74–91.

    Google Scholar 

  • Kollman, Ken, John Miller, and Scott Page (1992), “Adaptive parties in spatial elections,”American Political Science Review, vol. 86, pp. 929–937.

    Google Scholar 

  • Lambert, Richard (1983), “Long-term contracting and moral hazard,”Bell Journal of Economics, vol. 14, pp. 441–452.

    Google Scholar 

  • Lant, T. and S. Mezias (1990), “Managing discontinuous change: A simulation study of organizational learning and entrepreneurial strategies,”Strategic Management Journal, vol. 11, pp. 147–179.

    Google Scholar 

  • Lave, Charles, and James March (1975),An Introduction to Models in the Social Sciences, New York: Harper and Row.

    Google Scholar 

  • Law, Averill, and W. Kelton (1982),Simulation Modeling and Analysis, New York: McGraw-Hill.

    Google Scholar 

  • Lazear, Edward and Sherwin Rosen (1981), “Rank-order tournaments as optimum labor contracts,”Journal of Political Economy, vol. 89, pp. 841–864.

    Google Scholar 

  • Levinthal, Daniel (1988), “A survey of agency models of organizations,”Journal of Economic Behavior and Organization, vol. 9, pp. 153–185.

    Google Scholar 

  • Levinthal, Daniel, and James March (1981), “A model of adaptive organizational search,”Journal of Economic Behavior and Organization, vol. 2, pp. 307–333.

    Google Scholar 

  • Lindblom, Charles (1959), “The science of ‘muddling through,’”Public Administration Review, vol. 19.

  • McMillan, John (1990), “Managing suppliers: Incentive systems in Japanese and U.S. industry,”California Management Review, Summer 1990, pp. 38–55.

  • Malcomson, James and Frans Spinnewyn (1988), “The multiperiod principal-agent problem,”Review of Economic Studies, vol. 55, pp. 391–405.

    Google Scholar 

  • Mantrala, Murali, Prabhakant Sinha, and Andris Zoltners (1994), “Structuring a multiproduct sales quota-bonus plan for a heterogeneous sales force: A practical model-based approach,”Marketing Science, vol. 13, pp. 121–144.

    Google Scholar 

  • March, James (1978), “Bounded rationality, ambiguity, and the engineering of choice,”Bell Journal of Economics, vol. 9, pp. 587–608.

    Google Scholar 

  • March, James, and Johan Olsen (1979),Ambiguity and Choice in Organizations, 2nd. ed., Bergen: Universitetsforlaget.

    Google Scholar 

  • Marimon, Ramon, Ellen McGrattan, and Thomas Sargent (1990), “Money as a medium of exchange in an economy with artificially intelligent agents,”Journal of Economic Dynamics and Control, vol. 14, pp. 329–373.

    Google Scholar 

  • Mookherjee, Dilip (1984), “Optimal incentive schemes with many agents,”Review of Economic Studies, vol. 51, pp. 433–446.

    Google Scholar 

  • Ouchi, William (1979), “A conceptual framework for the design of organizational control mechanisms,”Management Science, vol. 25, pp. 833–848.

    Google Scholar 

  • Porteus, E. and S. Whang (1991), “On manufacturing/marketing incentives,”Management Science, vol. 37, pp. 1166–1181.

    Google Scholar 

  • Radner, Roy (1981), “Monitoring cooperative agreements in a repeated principal-agent relationship,”Econometrica, vol. 49, pp. 1127–1148.

    Google Scholar 

  • Radner, Roy (1985), “Repeated Principal-agent games with discounting,”Econometrica, vol. 53, pp. 1173–1198.

    Google Scholar 

  • Radner, Roy (1975a), “Satisficing,”Journal of Mathematical Economics, vol. 2, pp. 253–262.

    Google Scholar 

  • Radner, Roy (1975b), “A behavioral model of cost reduction,”Bell Journal of Economics, vol. 6, pp. 196–215.

    Google Scholar 

  • Radner, Roy and Michael Rothschild (1975), “On the allocation of effort,”Journal of Economic Theory, vol. 10, pp. 358–376.

    Google Scholar 

  • Rasmusen, Eric (1988),Games and Information: An Introduction to Game Theory, Oxford, UK: Basil Blackwell.

    Google Scholar 

  • Rose, David (forthcoming),Designing Incentives Under Conditions of Bounded Rationality, unpublished doctoral dissertation, Rensselaer Polytechnic Institute, Troy, NY.

  • Rosenthal, Robert (1993), “Rules of thumb in games,”Journal of Economic Behavior and Organization, vol. 22, pp. 1–13.

    Google Scholar 

  • Rubinstein, Ariel, and Menahem Yaari (1983), “Repeated insurance contracts and moral hazard,”Journal of Economic Theory, vol. 30, pp. 74–97.

    Google Scholar 

  • Sappington, David (1991), “Incentives in principal-agent relationships,”Journal of Economic Perspectives, vol. 5, pp. 45–66.

    Google Scholar 

  • Shavell, Steven (1979), “Risk sharing and incentives in the principal and agent relationship,”Bell Journal of Economics, vol. 10, pp. 55–73.

    Google Scholar 

  • Simon, Herbert (1972), “Theories of bounded rationality,” in C. B. McGuire and Roy Radner (eds.),Decision and Organization, Amsterdam: North-Holland.

    Google Scholar 

  • Simon, Herbert (1955), “A behavioral model of rational choice,”Quarterly Journal of Economics, vol. 69, pp. 99–118.

    Google Scholar 

  • Stanton, W. and R. Buskirk (1987),Management of the Sales Force, 7th ed., Homewood, IL: Irwin.

    Google Scholar 

  • Suppes, Patrick and Richard Atkinson (1960),Markov Learning Models for Multi-person Interations, Palo Alto, CA: Stanford University Press.

    Google Scholar 

  • Thompson, James. (1967),Organizations in Action, New York: McGraw-Hill.

    Google Scholar 

  • Tyagi, Pradeep (1990), “Inequities in organizations, salesperson motivation, and job satisfaction,”International Journal of Research in Marketing, vol. 7, pp. 135–148.

    Google Scholar 

  • Umanath, Narayan, Manash Ray, and Terry Campbell (1993), “The impact of perceived environmental uncertainty and perceived agent effectiveness on the composition of compensation contracts,”Management Science, vol. 39, pp. 32–45.

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Rights and permissions

Reprints and permissions

About this article

Cite this article

Rose, D., Willemain, T.R. The principal-agent problem with adaptive players. Comput Math Organiz Theor 1, 157–182 (1996). https://doi.org/10.1007/BF01299067

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF01299067

Keywords

Navigation