An Agent-Based Model of Delegation Relationships With Hidden-Action: On the Effects of Heterogeneous Memory on Performance

Abstract

We introduce an agent-based model of delegation relationships between a principal and an agent, which is based on the standard-hidden action model introduced by Holmström and, by doing so, provide a model which can be used to further explore theoretical topics in managerial economics, such as the efficiency of incentive mechanisms. We employ the concept of agentization, i.e., we systematically transform the standard hidden-action model into an agent-based model. Our modeling approach allows for a relaxation of some of the rather "heroic" assumptions included in the standard hidden-action model, whereby we particularly focus on assumptions related to the (i) availability of information about the environment and the (ii) principal's and agent's cognitive capabilities (with a particular focus on their learning capabilities and their memory). Our analysis focuses on how close and how fast the incentive scheme, which endogenously emerges from the agent-based model, converges to the solution proposed by the standard hidden-action model. Also, we investigate whether a stable solution can emerge from the agent-based model variant. The results show that in stable environments the emergent result can nearly reach the solution proposed by the standard hidden-action model. Surprisingly, the results indicate that turbulence in the environment leads to stability in earlier time periods.