Incentive Structures Maximizing Residual Gain under Incomplete Information
Volume: Volume 9, No. 1
Issue: Spring 1978
Pages: pp. 180-191
Authors: Leonid Hurwicz and Leonard Shapiro
Title: Incentive Structures Maximizing Residual Gain under Incomplete Information
Abstract: In a two-agent setting, one agent ("landlord") seeks to maximize his residual gain, i.e., that part of output remaining after payment of a reward to the other agent ("worker"). The reward must be a function of the worker's output since his effort cannot be directly observed, and the landlord must choose this function without knowing the worker's disutility and productivity parameters. A 50-50 split turns out to be the maximin (regret) solution in a broad class of cases, even if discontinuous reward functions are permitted. This "sharecropping" model suggests itself in problems where the first agent represents the government and the residual gain serves a paramount national or social objective.
JEL Classification
Land Ownership and Tenure Land Reform (7171)
Microeconomic Theory General (0220)
Economics of Uncertainty and Information Game Theory and Bargaining Theory: General (0260)