Optimal Incentive Contract with Endogenous Monitoring Technology (with Ming Yang) [Slides]

Recent technology advances give firms more flexibility to process and analyze the great amount of employee performance data at a reduced and yet significant cost. This paper develops a theory of optimal incentive contracting where the monitoring technology that governs the above described process is a subject of the designer's choice. In otherwise standard agency models with moral hazard, we allow the principal to partition the agent's raw performance data into finite categories, at a cost that increases with the fine-grainedness of the information that the induced performance signal carries. Through analyzing the trade-off between the incentive cost and the monitoring cost, we characterize the optimal incentive contract by information aggregation, strict MLRP, convex performance classification, the coexistence of individual and group monitoring among technologically similar firms, and the fine-tuning of monitoring intensity across tasks according to the agent's tendency to shirk. In various classical settings, we examine the implications of our results for the internal organization of firms, and discuss how our work helps guide the design of incentive contract in the information age. 

Intermediated Implementation (with Yiqing Xing)

Many real-world problems like sales, taxation and health care regulation, feature the interactions between a principal, one or more intermediaries and agents with hidden characteristics. In these problems, intermediaries can specify the full menu of the multi-faceted consumption bundles that they offer to agents, whereas the principal is limited to regulating some but not all aspects of the bundles that agents consume, due to legal, information and administrative barriers. We develop a theory of how the principal can implement in these situations any target social choice rule that is incentive compatible, individually rational and feasible among agents. We show that when intermediaries have private values and are perfectly competitive, the principal's goal can be achieved by imposing a per-unit fee schedule that allows intermediaries to break even under the target social choice rule. When intermediaries have interdependent values or market power, per-unit fee schedule cannot generally be used to achieve the principal's goal, whereas regulating the distribution of limited aspects of sold bundles can.  We examine the applicability of our results to the regulation of real-world intermediaries. 

Efficiency in Dynamic Moral Hazard Problems

This paper analyzes a dynamic principal-agent model with moral hazard where the agent's hidden actions can affect the probability distributions of both the current and future signals. The main result shows that near-efficiency can be attained when players interact for a large number of instances if the monitoring technology satisfies two basic properties called measure concentration and informativeness, and if the agent can be effectively penalized by reductions in the instantaneous consumption or the payoff from future interactions. This result is used to establish a Folk Theorem for discrete-time agency models with high discount factors, and to distinguish signal processes that can and cannot yield asymptotic efficiency in discretized continuous-time agency models with frequent actions. The analysis establishes a direct mapping between basic properties of the monitoring technology and the efficiency properties of dynamic agency models where the effect of the agent's actions may take time to materialize.

Robust Incentive Contract with Disagreement about Performance Evaluation and Compensation 

Online Appendix

I examine a principal-agent model with moral hazard, where the agent can disagree with the principal about how he should be evaluated and paid, and creates organizational frictions when the actual outcome falls short of what he thinks he deserves. The main result shows that seemingly rigid policies, such as long-term performance evaluation, compressed compensation scheme and seniority-based promotion, are robust tools for achieving incentive provision and disagreement management simultaneously, especially when the exact cause of the disagreement is not commonly known between contracting parties.

A Folk Theorem with Virtually Enforceable Actions

This paper proves a Folk Theorem for infinitely repeated private monitoring games with virtually enforceable actions. In these monitoring situations with scarce signals, players depart from the efficient outcome occasionally to acquire the information that detects the profitable deviations of their opponents. In a finite horizon setting with monetary transfers and public communication, I devise a novel Budget Mechanism with Cross-Checking (BMCC) which---through linking the players' action choices over time---virtually implements the efficient outcome at a vanishing incentive cost as the horizon grows and the players become patient. As the building block of my equilibrium construction for the infinitely repeated game, BMCC outperforms public-strategy mechanisms in scarce signal environments and carries important policy applications for labor contract design with costly subjective performance evaluation.

Work In Progress

Optimal News Consumption and Policy Polarization (with Lin Hu)

Optimal Pricing Through Strategic Menu Complexity

Political Accountability in the Media Age (with Davin Raiha)

In a short period of time social media has proliferated throughout the developed world. Blogs, tweets, and posts have become mainstream forms of media and important sources of news and information for many. But what is the impact of the emergence of social media on politics and political behavior? Is political accountability improved by social media? This paper explores how social media affects political accountability in ways that are different from conventional media. Compared to traditional media, social media is far less constrained with limitless broadcast time, more varied viewpoints, and broader media participation. As a result political life can be scrutinized as never before. While this might suggest that political accountability would be improved, we find that social media can have adverse welfare consequences by diverting the attention and effort of politicians to policies and activities of less importance (e.g. personal scandals), as well as change how voters process hard information. This results in less attention and salience being given to policies and projects with longer time-horizons or no immediate outcome (e.g. economic growth). We find that engineering information technology can help mitigate some problems.