Decision-facilitating information in hidden-action setups: an agent-based approach

Abstract

The hidden-action model captures a fundamental problem of principal-agent theory and provides an optimal sharing rule when only the outcome but not the effort can be observed (Holmström in Bell J Econ 10(1):74, 1979). However, the hidden-action model builds on various explicit and also implicit assumptions about the information of the contracting parties. This paper relaxes key assumptions regarding the availability of information included in the hidden-action model in order to study whether and, if so, how fast the optimal sharing rule is achieved and how this is affected by the various types of information employed in the principal-agent relation. Our analysis particularly focuses on information about the environment and about feasible actions for the agent. We follow an approach to transfer closed-form mathematical models into agent-based computational models and show that the extent of information about feasible options to carry out a task only has an impact on performance if decision makers are well informed about the environment, and that the decision whether to perform exploration or exploitation when searching for new feasible options only affects performance in specific situations. Having good information about the environment, on the contrary, appears to be crucial in almost all situations.

Effects of limited and heterogeneous memory in hidden-action situations

“…Equation 3 is known as the incentive compatibility constraint and aligns the agent's objective (maximize his utility) with the principal's objective. This constraint affects the agent's choice of effort level a [9,5,13,20,15]. In Table 1, the notation used in this section is summarized.…”

“…We take up on this stream of research and limit the cognitive abilities of the principal and the agent in the hidden-action model introduced by Holmström [12] by bounding their cognitive capacity (memory). In the vein of Leitner and Wall [15], we transfer the hidden-action model into an agent-based model variant using the approach introduced by Guerrero and Axtell [11], and Leitner and Behrens [14], which enables us to relax selected assumptions to implement the more natural concept of human cognitive ability.…”

Understanding the dynamics emerging from infodemics: a call to action for interdisciplinary research

“…Third, as coordination involves communication, the question whether communication in the course of coordination could accidentally or deliberately also be part of the infodemic is particularly difficult. Therefore, it is of ultimate importance to understand the dynamics which an infodemic unfolds so that the communication in the course of coordination does not fuel unwanted behavioral, social and economic dynamics but contributes to the guided self-organization of a society so that intended patterns (e.g., in terms of achieved objectives) emerge (Wall 2019;Leitner and Wall 2020;Reinwald et al 2020).…”

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

“…These changes are implemented by a simultaneous and sequential learning model (see also [7]). Part of this learning model is not only the process of gathering and storing the information but also the application of this information to compute the estimation of the exogenous factor.…”

“…We take up on this critique and put the "heroic" assumptions included in the standard hidden-action model [1] in the focus of this paper. In the vein of Leitner and Wall [7], we transfer the standard hidden-action model into an agentbased model following a procedure introduced by Guerrero and Axtell [8] and Leitner and Behrens [9], which allows us to relax some of the included assumptions. In particular, we relax the assumptions related to the principal's and the agent's (i) information processing capacity and (ii) the availability of information.…”