Research

Publication

Limited Liability and Non-responsiveness in Agency Models- Games and Economic Behavior, Volume 128, July 2021

(joint with Humberto Moreira)

This paper analyzes the optimal menu of contracts offered by a risk-neutral principal to a risk-averse agent under moral hazard, adverse selection, and limited liability. We show that a limited liability constraint causes pooling of the most efficient agent types. We also find sufficient conditions under which full pooling is optimal, regardless of the agent’s risk aversion or type distribution. Our model suggests that offering a single contract is often optimal in environments with moral hazard, adverse selection, and in which the principal faces a limited liability constraint.

Preprint version

Working papers

Agency in Hierarchies: Middle Managers and Performance Evaluations - R&R at the Journal of the European Economic Association

This paper studies the optimal joint design of incentives and performance rating scales in a principal-manager-worker hierarchy. The principal wants to motivate the manager and the worker to exert unobservable effort. Given effort choices, two signals are realized: public and verifiable team output and a non-verifiable signal about the worker’s effort, privately observed by the manager. The principal may try to elicit the manager’s private information by requiring her to evaluate the worker’s performance. Payments depend on team output and the manager’s evaluation. I show that the principal can achieve no more than what is feasible with a binary rating scale. Also, subjective performance evaluations are valuable if and only if the verifiable performance measure is more informative than the non-verifiable one. Finally, I show that the principal may benefit from reducing transparency in the organization, as the cost of implementing the desired efforts can strictly decrease when the manager has less information about the worker’s effort.

The Effect of Exit Rights on Cost-based Procurement Contracts - Online Appendix

(joint with Rodrigo Andrade and Humberto Moreira)

This paper studies optimal procurement contracts in an environment with dynamic information arrival and ex-post exit rights. A procuring agency designs contracts for a firm that receives information over time. In the first period, the firm gets a private non-fully informative signal about the project's cost. In the second period, the firm fully learns the cost and decides whether to keep the contract or take an exogenous ex-post outside option. We show that if the ex-post outside option value is sufficiently close to the ex-ante, the optimal mechanism takes a static form: all first-period signal reports are pooled into a single contract, and payments depend solely on the second-period reports. The interpretation is that optimal contracts do not condition transfers on ex-ante self-reported cost estimates but only on realized verifiable costs. Finally, we study if competition among a large number of firms allows the procuring agency to screen the first-period information and implement the second-best allocation. We show that the answer depends on the value of the ex-post outside option: for low values, the procuring agency can screen the first-period information and implement the second-best allocation at approximately no additional cost, while for high values, the cost of implementing the second-best allocation diverges. We relate our findings to firms' incentives to under-report expected costs, and the ubiquitous cost-overruns observed empirically in public projects.

Monitoring, Disclosure, and Retaliation

I analyze the effects of retaliation concerns on optimal contracts in a hierarchy consisting of a principal, a monitor, and an agent. With probability m, the monitor observes a signal about the agent’s effort and decides whether to reveal it to the principal. With probability (1-m), the monitor is uninformed. The agent retaliates against the monitor whenever the disclosed signal reduces his compensation from the no disclosure benchmark. Retaliation inflicts losses on the monitor and the principal directly. I show that the optimal contract pools moderately (potentially all) bad performances with the uninformative signal realization. The empirical literature demonstrates that performance evaluations are lenient, and supervisors are reluctant to provide poor ratings. I show that this pattern can stem from retaliation concerns.