Optimal Reward Design in Principal-Agent Model
Analysis
This paper investigates the optimal design of reward schemes and cost correlation structures in a two-period principal-agent model under a budget constraint. The findings offer practical insights for resource allocation, particularly in scenarios like research funding. The core contribution lies in identifying how budget constraints influence the optimal reward strategy, shifting from first-period performance targeting (sufficient performance) under low budgets to second-period performance targeting (sustained performance) under high budgets. The analysis of cost correlation's impact further enhances the practical relevance of the study.
Key Takeaways
“When the budget is low, the optimal reward scheme employs sufficient performance targeting, rewarding the agent's first performance. Conversely, when the principal's budget is high, the focus shifts to sustained performance targeting, compensating the agent's second performance.”