MGEC40H3 Lecture Notes - Lecture 9: Mira-Bhayandar Municipal Corporation, Negative Number, Optio
13 Dec 2018
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Refers to situations where one party (principal) employs another party (agent) to perform a task. Principal benefits when the agent exerts greater effort, but effort is unobservable and agent"s goals may not align with those of principal. Some examples of principal-agent relationships: a retail store owner and a salesperson; a litigant and his/her lawyer; shareholders of a company and the ceo; citizens of a town and the mayor. So, we need to consider optimal motivation and compensation mechanisms in order to align the agent"s incentives with those of the principal. Discussed a specific model to understand optimal compensation. Specific case of a store worker who incurs a cost of exerting effort. Raise the commission rate even further: going from a commission rate of 0% to 10% increased the principal"s profits, same logic suggests that principal can do even better by raising the commission further.
