University of Melbourne

Incentives for Boundedly Rational Agents

Email address: sbasov@bu.edu

Keywords: bounded rationality, incentives, principal-agent model.

JEL Classifications: C60, D82, D83

Abstract:
This paper develops a theoretical framework for analyzing incentive schemes under bounded rationality. It starts from a standard principal-agent model and then superimposes an assumption of boundedly rational behavior on the part of the agent. Boundedly rational behavior is modeled as an explicit optimization procedure which combines gradient dynamics with a speci…c form of social learning called imitation of scope. The model creates a frame-work for addressing the issues of the robustness and complexity of incentive schemes. The results help to shed light on the underprovision of optimal incentives and on gift-exchange behavior in the real world. As a by-product, a standard su˘cient statistics result from the agency literature is seen not to hold in this world.

PDF file of paper: basov.pdf

Session: Game Theory

Time: Friday, 6 July, 3:30pm - 5pm

Room: D