Trading between Agents for a Better Match

Abstract

This paper studies the externality that arises between principals when their agents can engage in ex post trading of the outcomes of their efforts to improve the matching of the outcomes to the principals. It shows that each principal has an incentive to use her contract with her own agent to reduce the transfers to the outside agent with whom a principal does not directly contract. This causes each principal to offer an inefficiently low piece-rate, which is also shown to be lower than that in a benchmark where trading is not allowed. Even though trading reduces an agent's effort and increases his outside option, a principal still gains from allowing trading because of the better match of the outcomes to their tastes.

Keywords: Search Agent, multiple principals multiple agents, externality, moral hazard

JEL Classification: L20, D86