Research
Working Papers
I study the optimal design of performance or product ratings to motivate agents’ performance or investment in product quality. The principal designs a rating that maps their quality (performance) to possibly stochastic scores. Agents have private information about their abilities (cost of effort/quality) and choose their quality. The market observes the scores and offers a wage equal to the agent’s expected quality [resp. ability].
I first show that an incentive-compatible interim wage function can be induced by a rating (i.e., feasible) if and only if it is a mean-preserving spread of quality [resp. ability] in the quantile space. Thus, I reduce the principal's rating design problem to the design of a feasible interim wage. When restricted to deterministic ratings, the optimal rating design is equivalent to the optimal delegation with participation constraints (Amador and Bagwell, 2022). Using optimal control theory, I provide necessary and sufficient conditions under which lower censorship, especially a simple pass/fail test, is optimal within deterministic ratings. In particular, when the principal elicits maximal effort (quality), lower censorship [resp. pass/fail] is optimal if the density is unimodal [resp. increasing]. I also solve for the optimal deterministic ratings beyond lower censorship for general distributions and preferences. For general ratings, I provide sufficient conditions under which lower censorship remains optimal. In the effort-maximizing case, a pass/fail test remains optimal if the density is increasing.
We study the optimal design of a two-player tournament in which one player has discretion over hiring the other. The manager hires an agent of a certain ability and competes with him in a Lazer-Rosen-style tournament. In the tournament, both players produce at heterogeneous marginal costs (abilities), and the one with higher output wins a fraction of the total output. The principal determines the payout ratio and the head start (or handicap) to the manager—an advantage (or disadvantage) when comparing output. We find the optimal contract offers just enough head start to induce the manager to hire the best candidate. However, in a two-period model where the first-period winner is retained for the future, the principal with succession concerns may allow hiring sabotage to prevail in equilibrium but will ensure the new hire has a higher ability than the manager.
Notes and Comments
I reformulate Gershkov and Winter’s (2023) model as a mechanism design problem under a feasibility condition. Thus, I provide the necessary and sufficient conditions for their Propositions 1, 2, 7, and 8, while allowing for stochastic priority levels. The weaker conditions enable both the provider’s revenue and consumer welfare to increase in priority levels if the cost distribution has a decreasing failure rate but satisfies Myerson’s regularity. Infinitely many priority levels can be implemented by an all-pay auction.
I revisit Albano and Lizzeri (2001) using an interim information design approach: I model certifications (tests) as Blackwell experiments and characterize the feasibility condition for interim posterior means to be inducible by Blackwell experiments. Thus, I consider an equivalent reduced-form problem where the intermediary designs a feasible interim posterior mean rather than the experiment itself. Transfers are limited to a flat certification fee, so the test is the only channel to provide incentives. I show the intermediary can maximize revenue by committing to a noisy test. Moreover, the interim approach applies to a more general class of problems, revenue maximization being a special case where the feasibility condition is equivalent to Bayesian plausibility.
I apply (hybrid) Pontryagin’s maximum principles in the optimal control theory to solve delegation problems (e.g., Amador and Bagwell 2013, 2022; Guo 2016), as an alternative to (cumulative) Lagrangian methods developed by Amador, Werning, and Angeletos (2006). In delegation problems with voluntary participation (Amador and Bagwell 2022), where the participation constraint leads to a jump in allocation, this approach makes it possible to study the global problem (instead of the truncated problem) and thus provide necessary and sufficient conditions.