Ian Jewitt

JUSTIFYING THE FIRST-ORDER APPROACH TO PRINCIPAL-AGENT PROBLEMS

It is of interest to know when the incentive compatibility conditio n in principal-agent problems can be replaced by the condition that the agents expected utility be stationary in effort. The Mirrlees-Rogerson conditions do not work if the principal can observe more than one observable statistic. Also, the Mirrlees-Rogerson assumption that the distribution function of output is convex in the agents action is unsatisfactory even in the context of the basi c model; it is too restrictive. The paper presents a suite of conditio ns that are applicable to the multistatistic case and replaces the objectionable convex distribution function assumption. Copyright 1988 by The Econometric Society.

The Economics of Career Concerns, Part I: Comparing Information Structures

Many incentives in organizations arise not through explicit formal incentive contracts but rather implicitly through career concerns. This paper models career concerns through agents trying to manipulate the market assessment of their future productivity. The information flow from current actions to market assessment is therefore crucial in determining the nature of these incentives. Improved information may either increase or reduce incentives. The impact of information provides a major distinction between the explicit and implicit incentives model. The paper derives general results on comparisons of information structures which serve as counterparts to the standard results on information structures in the principal-agent model: sufficient statistic, impact of a Blackwell garbling, comparison of inclusive information structures.

Multitask agency problems: Focus and task clustering

Abstract This short paper discusses recent insights of multitask agency theory. It considers in turn the issues of effort substitution, conflicts between tasks and implicit incentives and ‘mission’. It concludes by addressing the problem of optimal task clustering.

Risk Aversion and the Choice Between Risky Prospects: The Preservation of Comparative Statics Results

Most results in what can be termed the comparative statics of risk aversion are obtained when there is only one source of uncertainty. The primary example (which originally motivated the definition of risk aversion) is that more risk averse people are willing to pay a higher premium for insuring against risk. It is known that the results do not generally carry over when there is another source of uncertainty. The paper develops conditions under which comparative statics results are robust against the introduction of additional sources of uncertainty.

Uniform taxation and consumer preferences

Abstract Diamond and Mirrlees ( American Economic Review , 1971, 61, 8–27 and 261–278) showed that the first-order conditions for the Ramsey tax problem do not necessarily characterize tax optima. Researchers have since become cautious in using the first-order conditions. This paper establishes the validity of a version of the first-order conditions, using them to determine when uniform taxation is optimal. We show Deatons ( Review of Economic Studies , 1979, 46, 391–405) conditions to be sufficient, but not necessary, for our problem. We also give a necessary and sufficient condition for uniform taxation to be optimal in terms of the wage-compensated supply of labor and a closed-form representation for preferences.

‘Auditor professional judgement’: implications for regulation and the law

Auditors Paul Grout, Ian Jewitt, Chris Pong and Geoff Whittington The audit industry is in a state of turmoil and there are conflicting views on what should be done. Auditors have been criticised for their role in several well publicised corporate collapses and face huge lawsuits as a result. The problems are exacerbated by pressures for harmonisation which arise partly because of political developments, and partly because of the increasing sophistication and internationalisation of financial markets. We summarise the current situation and then discuss the policy issues from the viewpoint that auditor professional judgement plays a major role in the transmission of information. This viewpoint leads us to some provocative conclusions: taking too firm measures to ensure auditor independence may be against the interests of investors and creditors. The controversial UK Caparo decision that third party investors and creditors are not owed a duty of care by auditors might enhance information transmission. Steps to rule out creative accounting might be counterproductive: for example, in the context of bank regulation, the much criticised historic cost basis for evaluating assets may be better than marking to market.

Preference structure and piecemeal second best policy

Abstract This paper examines the question: When should prices in a subset of markets be set proportional to marginal costs even if other markets are distorted? The conditions on preferences and demand functions are derived; they are found to be weaker than have been required by previous authors.

A note on comparative statics and stochastic dominance

Abstract This is a bibliographical note which points out the applicability of some existing results to the development of a sort of Stochastic Dominance ‘algebra’. The ‘more risk averse’ relation of Ross (1981) is established within a general framework.

Optimal uniform taxation and the structure of consumer preferences

Abstract The well–known conditions for proportional commodity taxation to be optimal: that commodities be implicitly homogeneously separable from the single leisure good are sufficient conditions. It is not so clear from the published literature whether they are necessary or not. Mirrlees in an unpublished paper gives a form of direct utility function which is shown to be sufficient for proportional taxation to be optimal but which is not implicitly homogeneously separable. This paper generalizes the conditions and relates them to each other.

Employee buy-outs: Some theoretical issues

Abstract This paper discusses the incentives to change wages and employment within a company following an employee buy-out. The equilibrium is a two stage sequential one, the purchase decision being followed by the wage and employment decision. The main point we make is that if the pre buy-out wage and employment level is on the labour demand curve then after the buy-out the employees will never choose the wage that was paid before the buy-out. Furthermore, if the employees own all of the company then they will choose to reduce the wage to the competitive wage and may increase employment to the level that a profit maximizing firm would choose if it were paying the competitive wage. It may, however, constrain employment below this level.