10:30 - room F340
Principles vs. Principal
Reconciling social norms and private benefits
This paper considers situations where an agent (say, a polluting firm's manager) must allocate his nonobservable effort across two distinct tasks (say, revenue/market share enhancement and regulatory compliance), and where two principals (say, the firm's owners and a regulator) hold diverging viewpoints on what the best allocation should be. Both characteristics of this context - multi-tasking and conflicting principals - are normally seen as obstacles to strengthening the agent's incentives. This paper proposes a simple arrangement, based on contingent monitoring and clawbacks, that can overcome these obstacles. Under this arrangement, the principals would end up coordinating their respective incentive schemes so that the agent considers revenue enhancement and environmental compliance as complementary utility-increasing activities. Potential applications to corporate governance, corporate social responsibility, and green innovation are briefly discussed.