Gaming and Strategic Ambiguity in Incentive Provision
Florian P. Ederer
Yale School of Management
University of Chicago
University of Oxford - Department of Economics
January 7, 2013
UCLA School of Law, Law-Econ Research Paper No. 13-01
It is often suggested that incentive schemes under moral hazard can be gamed by an agent with superior knowledge of the environment, and that deliberate lack of transparency about the incentive scheme can reduce gaming. We formally investigate these arguments. Ambiguous incentive schemes induce more balanced efforts from an agent who performs multiple tasks and is better informed about the environment, but also impose more risk on the agent. If tasks are sufficiently complementary for the principal, ambiguous schemes can dominate the best deterministic scheme and can completely eliminate the efficiency losses from the agent's better knowledge of the environment.
Number of Pages in PDF File: 42
Keywords: gaming, strategic ambiguity, incentives, transparency
JEL Classification: L13, L22Accepted Paper Series
Date posted: January 8, 2013 ; Last revised: January 28, 2013
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