Principal-agent models in multi-dimensional settings

The thesis applies the Principal-Agent models to the following two settings: 1. The agent is employed to work on a multi-stage project; 2. The agent is responsible for multiple tasks. The method of analysis is an analytical one. Part I studies the multi-stage problem in which periodic applications of effort by the agent are required. The agent also obtains private information as the project evolves and he decides if the project should be abandoned or continued. We show that the agent’s decision to continue is not always aligned with the principal’s desire. The result provides an economic rationale for the sunk cost phenomenon. There also exist conditions under which the agent chooses to prematurely abandon the contract. Part II studies the effort allocation problem and provides insight with respect to the job design problem. When the agent is responsible for more than one task, the principal simultaneously studies the incentive problem for all the tasks and decides on the task grouping and assignment. The relative precision of the performance measures of the agent’s effort in each task affects the cost to the principal of extracting high effort levels from each of the task. The principal should not settle for costlessly available but highly noisy information. Rather, the management accounting system of each firm should be designed to be consistent with the technology of the firm, its product strategy, and its organization structure. This allows the principal to more efficiently induce desired levels of effort.Business, Sauder School ofGraduat