I have a question regarding the principal/agent perspective, and am hoping that somebody who finds much use in and is more familiar with the perspective can help me with that.

My question, I believe, concerns the perspective's view on the possibility or impossibility of achieving efficiency gains from group production in the presence of a proper incentive system and appropriate monitoring. In the perspective, the task of the principal in advancing her interests is to create an efficient incentive system such that the agent finds it in her interests to contribute to the well-being of the group and thus of the principal. To prevent the agent's shirking, the principal needs to develop a sytsem of monitoring the agent's performance. But it seems like accurate monitoring is problematic since the performance of the group production is influenced not only by the presence or absence of the agent's efforts, but also by other external factors. Information asymmetries are inevitable. The result is then inefficiencies.

In addition, Holmstrom (Bengt Holmstrom, "Moral Hazard in Teams," Bell Journal of Economics 13 (1982), pp. 324-340) seems to argue that no incentive system eliminates the incentives for agents to shirk, under a budget-balancing incentive system where the incomes generated by the group effort is distributed exactly among them. For the agent equates her own marginal effort cost with her share of the marginal benefit generated by her effort. The agent only receives a part of the benefits thus generated under the budget-balancing incentive system. But Pareto optimality requires that the agent work until her marginal productivity for the group as a whole equals her own marginal cost. The result is a situation of the Prisoners' Dilemma and organizational inefficiencies.

My question is: Are all these inefficiency arguments a widely accepted consensus or dominant view in the principal/agent literature? Or are there any principal/agent arguments that effectively refute the inefficiency arguments?

I would greatly appreciate it if someone could help me with this question.

Thank you.

Takayuki Sakamoto
Ph.D. candidate, Dept. of Political Science, UC Santa Barbara
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