Committee Decisions and Contracting
by
James Dearden
Lehigh University
Coauthors: Dorothy Klotz (Fordham University)

A committee of principals approach an agent about the production of a two-dimensional commodity. One dimension of the agent's production is verifiable, while the other is not. Having different preferences as to the importance of the two dimensions, the principals must agree by a majority-rule process on the contract they will offer the agent. After the agent receives the contract, she produces and then the committee considers whether to accept the agent's production. The contract employs two strategic tools to motivate the agent. The first tool is a minimum requirement on the verifiable dimension that motivates the agent to produce in the verifiable dimension. The second tool is a gatekeeper (i.e., one principal who has the power to determine whether the full group considers the agent's production). The gatekeeper motivates the agent to produce in the unverifiable dimension. We demonstrate that these strategic tools work fairly well, but not perfectly. Even with the ability to motivate the agent to produce in the unverifiable dimension, the agent still tends to overproduce in the verifiable dimension and underproduce in the unverifiable dimension. We also establish that the agent earns economic surplus only if she is poor at producing the verifiable characteristic as well as anywhere from moderately good to exceptionally good at producing the unverifiable characteristic.

Date received: July 7, 2000

Copyright © 2000 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Conferences Inc. Document # cafl-24.