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Incentive compatible compensation mechanism for centrally planned industry with multiple agents and communiction

University of British Columbia

This thesis applies the existing agency theory into the problem of production planning in a centrally planned industry. The planner's objective is to maximize social welfare contributed by the industry, while the firms individually want to maximize utility over money compensation minus disutility over effort. The problem contains both moral hazard and adverse selection because each agent privately observes a predecision information about the production process. A model is built for determining the optimal incentive compatible scheme. The analysis starts with the problem of fixed proportions production. An optimal incentive compatible scheme is first derived in single agent settings. It is then extended to multiple agent settings. Under the optimal incentive scheme, the principal is able to derive all the rent. The solution is the first-best when the agents are all risk neutral, and strictly second-best otherwise. The subgaming issues amongst the agents are investigated. When the agents are not cooperative, a sufficient condition is given for the incentive scheme to be effective, i.e., the equilibrium induced by the scheme is implementable. It is also concluded that, if the agents are able to cooperate, there always exist some state realizations under which the scheme is not effective. Finally, a different type of production problem, namely, production with substitutable inputs, are studied. And an incentive compatible compensation scheme is again proposed.

Text

2010-06-30

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http://hdl.handle.net/2429/26114

Business Administration

University of British Columbia

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