SFB 303 Discussion Paper No. A - 489
Author: Wessels, Joachim H.
Title: The Design of Incentives in the Presence of Lobbying Activity
Abstract: The effects of unproductive lobbying have so far mainly been addressed
by the public choice literature on rent-seeking and by Milgrom/Roberts'
(1988,1990) work on influence activities in organizations. Our paper makes
an attempt to incorporate lobbying into the simple principal-agent framework
that was proposed by Holmstr'm/Milgrom (1991).
This framework has been used by Itoh (1992) to analyze the costs and
benefits of relative performance evaluation (RPE), a method of pay that can
reduce agency costs by inducing competition between agents. One of Itoh's
main findings is that the principal may prefer the agents to cooperate if
there exist productive interactions that cause sabotage under a system of
RPE.
In our model, each of the two agents can affect the output signal that
determines his pay both by productive effort and by unproductive lobbying
that makes his performance appear better. We show first that the presence of
lobbying leads to lower-powered incentives in the optimal contract.
Secondly, complementing Itoh's findings, we conclude that even if there are
no productive interactions between agents, RPE may be non-optimal, because
its use would provide the agents with an additional incentive to engage in
lobbying. In this case, the principal will instead create a positive
interdependence between agents' income (a kind of implicit teamwork) to
reduce the attractiveness of lobbying.
Keywords: lobbying, rent-seeking, principal/agent theory, incentives, relative
performance evaluation
JEL-Classification-Number: D23, D72, D82, J33
Creation-Date: August 1995
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