Business Intelligence

Ex Ante Randomization In Agency Models

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Executive Summary

The authors consider how a principal can use randomized strategies in designing optimal contracts in agency settings. They distinguish between ex post randomization (over fee schedules following act selection by the agent) and ex ante randomization (over fee schedules before act selection). They show that ex ante randomization may be efficient in both full information and private information settings under certain assumptions regarding preferences and the production technology. It is particularly significant that additive separability and concavity of the agent's utility function as well as concavity of the production function do not rule out efficient ex ante randomized contracts in private information settings, although, as is known, they rule out ex post randomization.

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