Wealth and the Principal-Agent Matching. - Paulo Fagandini

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  • Author: Paulo Fagandini

Abstract

I study the role the agent's wealth plays in the principal-agent matching with moral hazard and limited liability. I consider wealth and talent as the agent's type, and size as the firm's (principal's) type. Because utility is not perfectly transferable in this setup, I use generalized increasing differences and find that wealthier agents match with bigger firms, when talent is homogeneous among them, whereas for equally wealthy agents, more talented agents will match with bigger firms. I describe economic conditions over types such that pairs of higher types will write contracts in which the agent obtains more than the information rents, through a higher bonus, increasing the  expected surplus. Finally, I provide an example in which wealth is distributed among agents in such a way that it reverses the standard result of positive assortative matching between talent and firm size.