The design of agency relations : four essays on contract theory, applications, and experimentation

Citation

Williamson, Dean V. (1999) The design of agency relations : four essays on contract theory, applications, and experimentation. Dissertation (Ph.D.), California Institute of Technology. doi:10.7907/amkv-hh05. https://resolver.caltech.edu/CaltechTHESIS:05122010-145733510

Abstract

The first part of the thesis takes up a contracting problem in which a venture capitalist (VC) finances agents to conduct risky projects in which the VC can neither observe the agents' actions nor verify the agents' actions ex post. The central issue is how to keep agent from cheating the VC by skimming profits. Theoretical results developed in the first chapter are applied in successive chapters to data sets of maritime contracts that pertain to the financing of Venetian trade in the years 1190-1220 and 1303-1351. The contract data indicate that risk-sharing between contracting parties would less likely obtain in the conduct of the most risk-laden ventures whereas contracting parties tended to share commercial risk in the conduct of those ventures that were least subject to both commercial and physical hazards. Such patterns in the contract data may, at first sight, seem counter-intuitive, but they line up with qualitative predictions of the theoretical framework. The central theoretical finding is that under general conditions debt contracts — contracts in which agents effectively buy the right to conduct a venture from the VC --dominate contracts in which the VC and agent share commercial risk. An exercise in dynamic optimization indicates that while there might be some scope for risk-sharing between the contracting parties, debt contracts neutralize informational rents an investor must otherwise yield to his agent to induce truthful reporting of outcomes the investor can neither observe nor verify. The second part of the thesis takes up an experimental examination of contracting. The experimental design involves a market in which agents buy and sell rights to participate in a follow-on stage of strategic interaction. The central question posed is how the game and the market, two different types of processes, interact. The results demonstrate that outcomes in the game are systematically linked to outcomes in the market. The game outcomes can be characterized by traditional game-theoretic solution concepts. Moreover, the market converges to a competitive equilibrium consistent with the Nash equilibrium that obtains in the game.

Thesis Files