The B.E. Journal of Theoretical Economics
Walter de Gruyter GmbH, Berlin/Boston
To punish an agent, the principal often incurs costs. I study a principal’s least costly reward and punishment scheme for an agent whose effort the principal cannot observe. I find the principal’s cost is sometimes minimized by using both costly rewards and costly punishments because (1) the agent has an outside option, or (2) a principal without commitment ability repeatedly interacts with the agent. I also find that when an agent’s effort is better at increasing the probability of a good outcome for the principal, the agent’s payoff may decrease, because the principal replaces rewards with punishments.
Online ISSN: 1935-1704
Xu Lee, Frances. Costly Rewards and Punishments. The B.E. Journal of Theoretical Economics, 20, 1: , 2019. Retrieved from Loyola eCommons, School of Business: Faculty Publications and Other Works, http://dx.doi.org/10.1515/bejte-2018-0131
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.
© Walter de Gruyter GmbH, Berlin/Boston, 2019.