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Ranking Agencies under Moral Hazard

Edward Henry Robbins and Bharat Sarath
Economic Theory
Vol. 11, No. 1 (Jan., 1998), pp. 129-155
Published by: Springer
Stable URL: http://www.jstor.org/stable/25055069
Page Count: 27
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Ranking Agencies under Moral Hazard
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Abstract

We provide rankings across uncertain outputs generated by agents functioning within the Principal-Agent paradigm. For agents who are identical except for their productivity, a necessary (but not sufficient) condition for an agent to be preferred is that her output dominates that of lower agents in the sense of First Degree Stochastic Dominance (FDSD) at every level of effort. Sufficient conditions are based on Blackwell's ranking of information systems and involves a characterization of FDSD using stochastic matrices. Our conditions for ranking outputs extends earlier results concerning the value of information within the agency framework. We also show how our techniques can be adapted to rank agents even if the first-order approach for determining optimal contracts fails to hold.

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