| This research studies the optimal decision making process of players participating in a long-term agency relationship. For the principal, the decision is on how to design the contract such that agents will behave the way such that the firm's profit is maximized; while for the agent, the question is how to allocate his efforts in various tasks such that his own personal interests are best served.; The first part studies the relationship in a setting in which multi-principals, are competing for one agent's service. The agent's market wage is a function of the agent's initial skill level. We show that the optimal contracts offered by principals with different technology depend on the principal's relative technology position in the industry, and the agent's initial skill level. The agent's decision on human capital investment depends on the agent's initial skill level, the contract offered, and market reservation wage. Welfare analysis is presented by comparing outcomes of the current model with that of a ‘classic’ agency model. We show that total social welfare may increase under certain conditions when the agents have the option of investing in their human capital.; The second part looks into situations where agents working in a team environment. The contract offers agents with a possibility of promotional prize, a fraction of an agent's own output and a share scheme of the firm's total output. Agents may allocate efforts into working on his own task assignments, helping team members and improving his own skills. We examine the decision making from agents' point of view within both short term and long term settings. Results of the models show that by adjusting the parameters of the contract, principal can affect agent's decision on their efforts allocation. Although the effects of agent's sharing of the outputs work similarly in different setting, the promotion prize may have completely different effects on the agent's decision. |
