When delegating a sequential search activity to an agent, a principal faces two information problems: the agent's discovery sort cannot be observed (hidden action) and the agents progress is private knowledge (hidden information). We characterize optimal incentive provision under monitored search (wherein the principal monitors the agents progress during the search process) anddelegated search (wherein the principal delegates decisions to an agent). We demonstrate how the organization of search activities responds to variations in the agent's costs and private benefits as search progresses to completion. Our findings provide a rationale for contracts that are observed in practice.
Search agency
OTTAVIANI, MARCO M.
2008
Abstract
When delegating a sequential search activity to an agent, a principal faces two information problems: the agent's discovery sort cannot be observed (hidden action) and the agents progress is private knowledge (hidden information). We characterize optimal incentive provision under monitored search (wherein the principal monitors the agents progress during the search process) anddelegated search (wherein the principal delegates decisions to an agent). We demonstrate how the organization of search activities responds to variations in the agent's costs and private benefits as search progresses to completion. Our findings provide a rationale for contracts that are observed in practice.
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