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7 J. L. Econ. & Org. 24 (1991)
Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design

handle is hein.journals/jleo7 and id is 464 raw text is: 24 JLEO, V7 Sp Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design Bengt Holmstrom Yale University Paul Milgrom Stanford University 1. Introduction In the standard economic treatment of the principal-agent problem, compen- sation systems serve the dual function of allocating risks and rewarding pro- ductive work. A tension between these two functions arises when the agent is risk averse, for providing the agent with effective work incentives often forces him to bear unwanted risk. Existing formal models that have analyzed this tension, however, have produced only limited results. 1 It remains a puzzle for this theory that employment contracts so often specify fixed wages and more generally that incentives within firms appear to be so muted, especially com- pared to those of the market. Also, the models have remained too intractable to effectively address broader organizational issues such as asset ownership, job design, and allocation of authority. In this article, we will analyze a principal-agent model that (i) can account for paying fixed wages even when good, objective output measures are avail- able and agents are highly responsive to incentive pay; (ii) can make recom- mendations and predictions about ownership patterns even when contracts can take full account of all observable variables and court enforcement is perfect; (iii) can explain why employment is sometimes superior to independent con- We are grateful to the National Science Foundation for financial support and to Gary Becker, James Brickley, Murray Brown, Joel Demski, Joseph Farrell, Oliver Hart, David Kreps, Kevin Murphy, Eric Rasmussen, Steve Ross, Steve Stem, and especially Avner Greif, Jane Hannaway, and Hal Varian for their many insightful comments, examples, and suggestions. We also wish to thank Froystein Gjesdal for pointing out two errors in an earlier draft. 1. Some of the predictive weaknesses of standard agency models are discussed in the surveys by MacDonald, Hart and Holmstrom, and Baker, Jensen, and Murphy. © 1991 by Oxford University Press. All rights reserved. ISSN 8756-6222

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