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Holmstrom (1999) - The Firm As A Subeconomy (view source)
Revision as of 19:14, 29 September 2020
, 19:14, 29 September 2020no edit summary
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|Has page=Holmstrom (1999) - The Firm As A Subeconomy
|Has bibtex key=
|Has article title=The Firm As A Subeconomy
|Has author=Holmstrom
|Has year=1999
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*This page is referenced in [[PHDBA602 (Theory of the Firm)]]
Assuming <math>y\;</math> is diffentiable (which is not innocuous) and strictly concave (diminising returns to scale, or increasing costs of effort), then <math>e^*\;</math> is completely characterized by (marginal benefit equals marginal cost):
:<math>\frac{\partial <math>y(e^*)}{\partial e_i} = 1 \quad \forall i=1,\ldots,n\;</math>
Thus as long as the measure is not collinear with output, it provides additional info and can be used to strengthen incentives. This extends directly to <math>n\;</math> workers.
==Ownership and Incomplete Contracts==
Without specifying <math>R(\cdot)\;</math> above, there is not simple analytical solution to either the first best or the second best. However, as manipulation becomes infinitely costly (i.e. <math>\lambda \to \infty\;</math>) the principal sets:
:<math>\alpha_1 - p_1 \;\mbox{and }\; \alpha_2 = p_2\;</math>
