How to Restore Higher-Powered Incentives in Multitask Agencies

Abstract

In multiple-task agency setups, it is commonly accepted that wage incentives must be weaker when the agent's performance on some of the activities is difficult to measure. This paper shows that stronger incentives can be restored through a scheme of selective audits, in which the appraisal of less tangible activities is contingent on observing high performance levels in the more visible tasks. This scheme would make the efforts expended on the various tasks complementary rather than substitutes in the agent's utility function. It is optimal under plausible assumptions concerning the monitoring technology (separability of the multivarviable likelihood function) and the agent's risk behavior (absolute prudence larger than three times absolute risk aversion).

JEL Classification: D81, D82